CHAPTER SEVEN

DISTRIBUTION STRATEGIES IN INTERNATIONAL CONTEXT

7.1. Meaning of Logistic
Global logistics is defined as the design and management of a system that directs and controls the
flows of materials into, through and out of the firm across national boundaries to achieve its
corporate objectives at a minimum total cost.
Global logistics encompasses the entire range of operations concerned with products or components
movement, including both exports and imports simultaneously. Global logistics, like domestic
logistics, encompasses materials management, sourcing, and physical distribution.
Materials management refers to the inflow of raw materials, parts, and supplies in and through the
firm. Physical distribution refers to the movement of the firm’s finished products to its customers,
consisting of transportation, warehousing, inventory, customer service/order entry, and
administration. Sourcing strategy refers to an operational link between materials management and
physical distribution, and deals with how companies manage R&D (e.g., product development and
engineering), operations (e.g., manufacturing), and marketing activities.

Figure 7.1 Global Logistics

7.1.1. Importance of Logistics to International Trade
1. Efficient allocation of resources.
2. Expansion of economic growth and employment.
Logistics Functions
Labeling, packing, traffic management, inventory, and storage.
7.1.2. External Influences on Logistics Decisions
a. Regulations: Export controls, tariffs, nontariff barriers, privatization and deregulation of
transportation and communications.
b. Competition: Competitive pressures on firms to examine logistics systems, that is, to reduce costs
etc.
c. Technology: New technologies now enable importers to know the date of shipment, location of
cargo on transit and expected date of arrival.
7.1.3. Transportation
Finally, transportation decisions concern the method, or mode, a company should utilize when
moving products through domestic and global channels. The word mode implies a choice, and the

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major SIX transportation mode choices are air, truck, water, rail, pipeline, and Internet—are widely
used in global distribution.
Table 7.1 Comparison of Major International Transportation Modes

Containerization was a key innovation in physical distribution that facilitates intermodal

transportation.

7.2. Accessing Foreign Market Channels of Distribution

7.2.1. Channel of Distribution
Channel of Distribution is a set of interdependent organizations (intermediaries) involved in the
process of making a product or service available for use or consumption.
A distribution channel consists of the set of people and firms involved in the transfer of title to a
product as the product moves form producer to ultimate consumer or business user. A channel of
distribution always includes both the producer and the final customer for the product in its present
form as well as any middlemen such as retailers and wholesalers.
Direct and Indirect Selling Channel
A manufacturer can sell directly to end users abroad, but generally it is not suitable for most
consumer goods. In effect, it is common for a product to go through several parties before reaching
the final consumer in foreign market.
In general, companies use two principal channels of distribution when marketing abroad:
(1) Direct selling and
(2) Indirect selling channel
1. Direct Selling Channel
• Direct selling is employed when a manufacturer develops an overseas channel.
• The manufacturer is deal directly with a foreign party without intermediary in the home
country.
• The manufacturer set up the overseas channel and exports through its own internal export
department or organization. Thus, they take care of the business activities between the countries
and responsible for shipping the product to foreign markets.
Advantage
• Active market exploitation

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• Greater control
• The channel improves communication and allows the company’s policy to be followed more
uniformly.
Disadvantage
 Difficult to manage if the manufacturer is unfamiliar with the foreign market.
 The channel is time consuming and expensive.
 Without a large volume of business, the manufacturer may find it too costly to maintain the
channel.
Types of Direct Channel Intermediaries
A. Foreign Distributor
It is a foreign firm that has exclusive rights to carry out distribution. The distributor purchases
merchandise at a discount and then resells or distributes the merchandise to retailers and sometimes
to final consumers. The length of association between the manufacturer and its foreign distributor is
established by a contract.
In some situations, the foreign distributor is merely a subsidiary of the manufacturer. For instance,
Seiko USA., is a distributor for its Japanese parent (Hattori Seiko), which manufactures Seiko
watches. Nevertheless, more frequently a foreign distributor is an independent merchant. A
distributor sometimes takes on the name of the brand distributed, though the distributor is an
independent operator and not owned by the manufacturer.
Benefits of using a foreign distributor
 The distributor is a merchant who buys and maintains merchandise in its own name. This
simplifies the credit and payment activities for the manufacturer.
 To carry out the distribution function, the foreign distributor is often required to warehouse
adequate products, parts, and accessories and to make facilities and personnel immediately
available to service buyers and users.
B. Foreign Retailer
Foreign retailers are used for consumer product rather than an industrial product. There are several
means by which a manufacturer may contact foreign retailers and interest them in carrying a product,
ranging from a personal visit by the manufacturer’s representative to mailings of catalogs, brochures,
and other literature to prospective retailers. The use of personal selling or a visit, al-though
expensive because of travel costs and commissions for the manufacturer’s representative provides
for a more effective sales presentation as well as for better screening of retailers for the distribution
purpose. The use of direct mail, although less expensive, may not sufficiently catch the retailers’
attention.
C. State-Controlled Trading Company
For some products, particularly utility and telecommunication equipment, a manufacturer must
contact and sell to state-controlled companies. For example: Hungary has about one hundred state

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trading organizations for a variety of products, ranging from poultry to telecommunication
equipment and for both imported and exported products.
D. End User
Sometimes, a manufacturer is able to sell directly to foreign end users with no intermediary involved
in the process. This direct channel is a logical and natural choice for costly industrial products. For
most consumer product the approach is only practical for some products and in some countries. A
significant problem with consumer purchases can result from duty and clearance problems. A
consumer may place an order without understanding his or her country’s import regulations. When
the merchandise arrives, the consumer may not be able to claim it. As a result, the product may be
seized or returned on a freight-collect basis. Continued occurrence of this problem could become
expensive for the manufacturer.
2. Indirect Selling Channel
Indirect selling, also known as the local or domestic channel. It is employed when a manufacturer
markets its product through another local firm/middlemen/. The manufacturer has no need to set up
an international department. The middleman, acting as the manufacturer’s external export
organization, usually assumes responsibility for moving the product overseas.
Advantages of indirect channel
 Simple and inexpensive
 The manufacturer incurs no start-up cost for the channel
 It is comforted of the responsibility of physically moving of the goods overseas.
Limitations indirect channel
@ The manufacturer has given up control over the marketing of its product. This situation may
affect the product’s success in the future.
@ The manufacturer may become vulnerable, if its intermediary is not aggressive, especially
where competitors are careful about their distribution practices.
@ The intermediary can easily discontinue handling a manufacturer’s product if there is no profit
or if a competitive product offers a better profit.
Types of Indirect Channel Intermediaries
There are many kinds of local sales intermediaries, all can be grouped under two broad categories:
(1) Domestic agents and (2) Domestic merchants.
The basic difference between the two is ownership (title) rather than just the physical possession of
the merchandise. Domestic agents never take title to the goods, regardless of whether the agents take
possession of the goods or not. Domestic merchants, on the other hand, own the merchandise,
regardless of whether the merchants take possession or not.
(1) Domestic Agents
Domestic agents can be further classified as those represent the buyer and the manufacturer’s
interest.

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Ä Those who work for the manufacturer are:
a. Export brokers c. Export management companies, and
b. Manufacturer’s export agents or sales d. Cooperative exporters
representative
Ä Agents who look after the interests of the buyer include: Purchasing (buying) agents/offices
and Country-controlled buying agents.
a. Export brokers
The function of an export broker is to bring a buyer and a seller together for a fee. It negotiates the
best terms for the manufacturer but cannot conclude the transaction without the principal’s approval
of the arrangement. As a representative of the manufacturer, the export broker may operate under its
own name or that of the manufacturer. An export broker does not take possession or title to the
goods.
Export Broker Useful:
• For its extensive knowledge of the market supply, demand, and foreign customers that
enables them to negotiate the most favorable terms for the principal.
• For highly specialized goods and seasonal products that do not require constant distribution.
b. Manufacturer’s Export Agent or Sales Representative
This is an independent businessperson who usually retains his or her own identity by not using the
manufacturer’s name. A sales representative have more freedom than the manufacturer’s own
salesperson. It may represent manufacturers of related and noncompeting products. Like a broker,
the manufacturer’s export agent works for commission. Unlike the broker, the relationship with the
manufacturer is continuous and more permanent. The manufacturer retains some control because the
contract defines the territory, terms of sale, method of compensation, and so on.
[Link] Management Company (EMC)
An EMC is also known as combination export manager (CEM) because it may function as an
export department for several allied but noncompeting manufacturers. The EMC has greater freedom
and considerable authority than export brokers and manufacturer’s export agents and provides
extensive services, ranging from promotion to shipping arrangement and documentation and
responsible for all of the manufacturer’s international activities. The EMC handles all, not just a
portion, of its principal’s products and faces a dilemma because of a double risk: it can easily be
dropped by its clients either for doing a poor job or for making the manufacturer’s products too
successful. EMC compensation is in the form of a commission, salary, or retainer plus commission.
Many EMCs are also traders (i.e., export merchants) as both agents and merchants.
d. Cooperative Exporter
A cooperative exporter is a manufacturer with its own export organization that is retained by other
manufacturers to sell in some or all foreign markets. The cooperative exporter functions like any

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other export agents: Operate as an export distributor for other suppliers, and also acting as a broker,
because it arranges shipping and takes possession of goods but not title.
A problem may arise if the principal decides to market a new product that competes directly with the
cooperative exporter’s own product or those of the exporter’s other clients.
e. Purchasing/Buying Agent
A purchasing/buying agent represents a foreign buyer. It is also known as commission agent, buyer
for export, export commission house, and export buying agent. By residing and conducting business
in the exporter’s countries and seek a product that matches the foreign principal’s preferences and
requirements. Client pays a fee or commission for the services rendered. The relationship with either
seller or buyer is not continuous. The transaction between the manufacturer and the buying agent
may be completed as a domestic transaction in the sense that the agent will take care of all shipping
arrangements. Otherwise, the manufacturer will have to make its own arrangements.
f. Country-Controlled Buying Agent
They performs exactly the same function as the purchasing/ buying agent, the only distinction being
that a country-controlled buying agent is actually a foreign government’s agency or quasi-
governmental firm where they: are empowered to locate and purchase goods for its country, may
have a permanent office in major suppliers, and may make formal visits to supplier countries when
the purchasing need arises.
g. Resident Buyer
It is an independent agent that is usually located near highly centralized production industries.
Unlike purchasing agent, the resident buyer is retained by the principal on a continuous basis. It can
offer a favorable opportunity for a suppliers as long as they are competitive in terms of price,
service, style, and quality. The resident buyer offers the purchasing, follow up function, for a foreign
buyer.
(2) Domestic Merchants
They all take title; they are distinguished by other features, such as physical possession of goods and
services rendered.
i. Export Merchant
They seeks out needs in foreign markets and makes purchases from manufacturers in its own country
to fill those needs. Usually handles staple goods, undifferentiated products, or those in which brands
are unimportant. Export merchant resells the goods in its own name. The merchant assumes all risks
associated with ownership. May or may not offer a steady business relationship to his/her supplier.
ii. Export Drop Shipper
It is also known as desk jobber or cable merchant, is a special kind of export merchant. Drop
shippers purchase product whenever they receive orders from overseas. It is common for bulky
products of low unit value (e.g., coal, lumber, construction materials).
Reasons why the foreign buyer use export drop shipper

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 When buyer’s order may be too small to attract the manufacturer to deal directly
Highly specialized in knowing the sources of supply and markets
The drop shipper also has information and advice about the needed product and can arrange all
details for obtaining it.
[Link] Distributor
Deals with the manufacturer on a continuous basis. Has exclusive right to represent and to sell in
some or all foreign markets. It pays for goods in its domestic transaction with the manufacturer and
handles all financial risks in foreign trade. It operates in its own name or in that of the manufacturer.
It handles all shipping details, thus relieving the manufacturer of having to pay attention to
overseas activities. It represents several manufacturing firms; it is sometimes regarded as a form of
EMC.
[Link] Company
Those that want to sell and buy often have no knowledge of each other or no knowledge of how to
contact each other. Trading companies thus fill this void. Many of them are large and have branches
wherever they do business. A trading company may buy and sell as a merchant.
7.2.2. Channel Decisions
As domestic market, the international market requires a marketer to make at least three channel
decisions:
1. Channel length is concerned with the number of times a product changes hands among
intermediaries before it reaches the final consumer: The channel is long - several middlemen &
the channel is short- when the product has change hands only once or twice.
2. Channel width is related to the number of middlemen at a particular point or step in the
distribution channel. It is a function of the number and kind of wholesalers used, as well as a
function of the number and kind of retailers used. The channel is wider and more intensive- as
more intermediaries or more types are used & the channel is selective- a few qualified
intermediaries are needed to provide product. The channel is exclusive- if one intermediary of one
type is used in that particular area.
3. Another decision that concerns the manufacturer is the number of distribution channels to be
used. The manufacturer may employ many channels to move its product to consumers. For
example, it may use a long channel and a direct channel simultaneously.
7.2.3. Determinants of Channel Types
Factors that must be taken into account to assist a manufacturer in making a good channel decision
include:
@ Legal Regulations @ Local Customs
@ Product Image @ Control
@ Middlemen’s loyalty and conflict @ Power and Coercion
7.3. Selection, Motivation and Control of Foreign Middlemen

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In the beginning of a market entry, partnerships with local distributors make good sense: Distributors
know the distinctive characteristics of their market, and most customers prefer to do business with
local partners. Arnold (2000) propose the following guidelines to the international marketer
(manufacturer) in order to anticipate and correct potential problems with international distributors:
@ Select distributors – do not let them select you.
@ Look for distributors capable of developing markets, rather than those with a few obvious
contacts.
@ Treat the local distributors as long-term partners, not temporary market-entry vehicles.
@ Support market entry by committing money, managers, and proven marketing ideas.
@ From the start, maintain control over marketing strategy.
@ Make sure distributors provide you with detailed market and financial performance data.
@ Build links among national distributors at the earliest opportunity
Once the basic design of the channel has been determined the international marketer must begin to
fill it with the best available candidates, and must secure their cooperation.
7.3.2. Motivating
Agents and distributors can be motivated in many ways to do the best possible job of marketing and
promoting the firm’s product. This could be accomplished by, for example, developing good
communications through regular visits from the home office, the organization of conferences, or
providing inexpensive free trips for representatives during a given period. It is also important to
inform representatives, the company’s goals and principles, and to keep them abreast of new
developments in the product line, supplies, and promotion strategies, and to assist in training and
market development. Firms could also motivate representatives through provision of better credit
terms or price adjustments based on sales volume or other performance based criteria.
7.3.3. Controlling
Control problems are reduced substantially if intermediaries are selected carefully. However, control
should be sought through the common development of written performance objectives. These
performance objectives might include some of the following: sales turnover per year, market share
growth rate, introduction of new products, price charged and marketing communications support.
Control should be exercised through periodic personal meetings.
Evaluation of performance has to be done against the changing environment. In some situations
economic recession or fierce competition activity prevents the possibility of objectives being met.
However, if poor performance is established, the contract between the company and the channel
member will have to be reconsidered and perhaps terminated.
In addition, differences in expectations and goals between the company and its foreign
intermediaries can lead to channel conflict. To deal with this, companies must actively manage the
relationship between themselves and their intermediaries, and often among intermediaries

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themselves, in an effort to create a harmonious relationship characterized by loyalty, trust,
cooperation, and open communication.