Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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affected by the proﬁt motive as well as by market

conditions. In any case, the export merchant hopes

that the price at which the product is sold will

exceed all costs and expenses in order to provide a

proﬁt. An export merchant may sometimes seek

extra income by importing goods to complement its

export activities. The merchant may or may not

offer a steady business relationship to his supplier.

Export drop shipper

An export drop shipper, also known as a desk jobber

or cable merchant, is a special kind of export

merchant. As all these names imply, the mode of

operation requires the drop shipper to request a

manufacture to “drop ship” a product directly to the

overseas customer. It is neither practical nor desir-

able for the shipper to physically handle or possess

the product. Based on this operational method, the

shipper’s ownership of the goods may last for only

a few hours.

Upon receipt of an order from overseas, the

export drop shipper in turn places an order with a

manufacturer, directing the manufacturer to deliver

the product directly to the foreign buyer.The man-

ufacturer collects payment from the drop shipper,

who in turn is paid by the foreign buyer.

Use of a drop shipper is common in the inter-

national marketing of bulky products of low unit

value (e.g., coal, lumber, construction materials).

The high freight volume relative to the low unit

value makes it prohibitively expensive to handle

such products physically several times. Minimizing

physical handling reduces the cost accordingly.

One may question why a manufacturer does not

simply deal directly with a foreign buyer, bypassing

the drop shipper and saving money in the process –

the shipping instructions would reveal the name and

address of the foreign buyer.The answer is that the

manufacturer can reduce the risk while simplifying

the transactional tasks. It is a great deal easier for

the manufacturer to call the export drop shipper

in the manufacturer’s own country instead of trying

to sell to and collect from the buyer in a far-away

destination.

There are also good reasons why the foreign

buyer may not be able to or want to bypass the

export drop shipper. The buyer may not have ade-

quate product knowledge or supply knowledge, and

the buyer’s order may be too small to entice the

manufacturer to deal directly. The drop shipper is

thus valuable because this kind of merchant is 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.

Export distributor

Whereas export merchants and drop shippers pur-

chase from a manufacturer whenever they receive

orders from overseas, an export distributor deals

with the manufacturer on a continuous basis. This

distributor is authorized and granted an exclusive

right to represent the manufacturer 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.

An export distributor differs from a foreign dis-

tributor simply in location.The foreign distributor

is located in a particular foreign country and is

authorized to distribute and sell the product there.

The export distributor, in comparison, is located in

the manufacturer’s country and is authorized to sell

in one or more markets abroad. Consider Mamiya,

a Japanese manufacturer. J. Osawa is Mamiya’s

worldwide distributor (i.e., export distributor).

Bell and Howell: Mamiya is in turn J. Osawa’s exclu-

sive US distributor (i.e., foreign distributor).

The export distributor operates in its own name

or in that of the manufacturer. It handles all ship-

ping details, thus relieving the manufacturer of

having to pay attention to overseas activities. In

other words, the sale made to the export distribu-

tor is just like another domestic transaction for the

manufacturer. Because the export distributor, as a

rule, represents several manufacturing ﬁrms, it is

sometimes regarded as a form of EMC.

The export distributor usually sells the manu-

facturer’s product abroad at the manufacturer’s list

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price and receives an agreed percentage of the list

price as remuneration; that is, the export distribu-

tor is either paid by commission or allowed a dis-

count for its purchase.The manufacturer may bill a

foreign buyer directly or may let the distributor bill

the buyer to obtain the desired margin.

Trading company

Those that want to sell and those that want to buy

often have no knowledge of each other or no know-

ledge of how to contact each other. Trading com-

panies thus ﬁll this void. In international marketing

activities for many countries, this type of interme-

diary may be the most dominant form in volume of

business and in inﬂuence. Many trading companies

are large and have branches wherever they do busi-

ness. They operate in developing countries, devel-

oped countries, and their own home markets.

Half of Taiwan’s exports are controlled by trading

companies. In Japan, general trading houses are

known as sogo shosha, and the largest traders include

such well-known MNCs as Mitsubishi, Mitsui, and

C. Itoh.The nine largest trading ﬁrms handle about

half of Japan’s imports and exports. Even large

Japanese domestic companies buy through trading

companies.

A trading company performs many functions:the

term describes many intermediaries that are neither

brokers nor import merchants. A trading company

may buy and sell as a merchant. It may handle goods

on consignment, or it may act as a commission

house for some buyers. By representing several

clients, it resembles an EMC, except for the fact that

it (1) has more diverse product lines, (2) offers

more services, (3) is larger and better ﬁnanced, (4)

takes title (ownership) to merchandise, (5) is not

exclusively restricted to engaging in export trade,

and (6) goes beyond the role of an intermediary

(which provides only export facilitation services) by

engaging directly in production, physical distribu-

tion channel development, ﬁnancing, and resource

development.

As the name implies, the trading company trades

on its own account for proﬁt. By frequently taking

title to the goods it handles, its risks of doing busi-

ness greatly increase. A trading company does not

merely represent manufacturers and/or buyers,

thus reducing risks, because increased risks are

usually accompanied by increased rewards. In the

case of WSJ International, which is a trader as well

as a representative, proﬁt margins gained on trading

are about four times greater than margins on rep-

resentative sales. It is thus not surprising that trading

accounts for half of the company’s revenues.

Manufacturers and buyers use trading companies

for good reasons.The trading company gathers mar-

ket information;does market planning, ﬁnds buyers;

packages and warehouses merchandise; arranges and

prepares documents for transportation, insurance,

and customs; provides ﬁnancing for suppliers

and/or buyers; accepts business risks; and serves

foreign customers after sales. It is, in short, a valu-

able entity in overcoming cultural and institutional

barriers. Nanodata, for example, concluded that it

was too expensive to reach unfamiliar and distant

market areas. The company hired TKB Technology

Trading Corporation, a trading company, to identify

good European markets for Nanodata’s computer

and to develop a distribution channel by choosing

agents, distributors, or direct subsidiaries. TKB

offered entry without expensive staff buildup until

Nanodata was ready to do so on its own.

Like other intermediaries, however, the trading

company must always face the possibility of being

bypassed by its clients, and it thus must offer some-

thing of value to its customers.This holds true even

for Mitsubishi, the world’s largest trader with more

than $164 billion in sales.Without its own produc-

tion, this company could be squeezed out by

Japanese clients that would set up their own mar-

keting departments. Mitsubishi’s solution in keeping

old customers and getting new ones is to give

buyers and sellers an incentive to do business with

it. It has formed joint ventures with American and

Japanese partners with an aim to acquire ownership

inﬂuence with both its suppliers and customers.

Furthermore, this ﬁrm cannot be easily replaced

because of its long experience, expertise, and estab-

lished networks.

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Japanese trading companies

Because of the spectacular success of the huge

Japanese trading companies, many companies –

especially those in the USA – would like to emulate

or duplicate them. Japanese trading companies per-

form a number of marketing functions:market iden-

tiﬁcation and analysis, sales forecasts, buying goods

from manufacturers, selling goods to customers,

and bearing ﬁnancial risks (see Figure 12.4).

Japanese trading companies have several distinct

characteristics. They are supported by domestic

Japanese business.They are partners with groups of

banks and other ﬁnancial intermediaries, allowing

them easy, convenient,and almost permanent access

to enormous amounts of capital and ﬁnancing.

Traditionally, Japanese manufacturers prefer to

separate manufacturing from marketing, leaving the

marketing function to trading ﬁrms.A new breed of

Japanese manufacturers, however, prefers to have

more marketing control and has been shifting away

from this pattern of specialization by pursuing

forward integration. Responding to this adverse

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CHANNELS OF DISTRIBUTION

Figure 12.4

Japanese trading company

Source:

Reprinted with permission

of Marubeni America Corporation.

trend, the sogo shosha is emphasizing its core com-

petence: information gathering. It has transformed

itself into an information-based organization.

Export trading companies

In the USA, the Export Trading Company (ETC) Act

was passed in 1982.Title III of the 1982 Act allows

domestic competitors to obtain binding antitrust

preclearance for speciﬁed export activities. By

granting prior antitrust immunity, the antitrust

threat was removed, creating a favorable environ-

ment for the formation of joint export ventures.

The ﬁrms that have recently formed ETCs are

from various backgrounds. Some are manufacturers

with subsidiaries that have ready access to the

parents’ products. GE Trading Company, for

example, has access to GE’s 300,000 products.

Retailers such as Sears and Kmart have a great deal

of bargaining power because of their enormous pur-

chases, and this leverage serves them well in mar-

keting US exports through foreign retail chains.

Other organizations forming ETCs are banks, which

seem natural for this purpose. Because banks can

own up to 100 percent of an ETC’s stock, these

ETCs are guaranteed to have adequate ﬁnancial

resources. In some cases, banks and other business

ﬁrms may want to form a joint venture, as in the

case of First Chicago and Sears World Trade, Inc.

One problem with ETCs is that the ETC Act is

designed to promote only US exports.Thus ETCs’

import activities must take a secondary position,

undertaken only when they are needed to promote

exports. Consequently, ETCs may lack an efﬁcient

infrastructure for developing two-way trade. In this

regard, ETCs differ greatly from Japanese trading

companies, which achieve their efﬁciencies through

domestic, foreign, and third-country trading activi-

ties.American ETCs may thus lack a comprehensive

international perspective.

CHANNEL DEVELOPMENT

The suitability of a particular channel depends

greatly upon the country in which it is used. A par-

ticular type of intermediary that works well in one

country may not work well elsewhere or may lose

effectiveness over time. This does not necessarily

mean that each country requires a unique channel.

However, a company may ﬁnd that a country classiﬁ-

cation system is useful, a system that can be used to

determine how the distribution strategy should be

set up from one group of countries to another.

Litvak and Banting suggest the use of a country

temperature gradient to classify countries.

Their

classiﬁcation system is based on the following

environmental characteristics: (1) political stability,

(2) market opportunity, (3) economic development

and performance, (4) cultural unity, (5) legal barri-

ers/restrictions, (6) physiographic barriers, and (7)

geocultural distance. Based on these characteristics,

countries may be classiﬁed as hot, moderate, or

cold. A hot country is one that scores high on the

ﬁrst four characteristics and low on the last three.

A cold country is exactly the opposite, and a mod-

erate one is medium on all seven characteristics.

The USA generally falls in line with the charac-

teristics of a hot country. So does Canada, even

though its cultural unity is moderate (rather than

high) and its physiographic barriers are moderate

(rather than low). Germany, likewise, is a hot

country in spite of some slight interference in the

sense that its legal barriers and geocultural distance

are moderate rather than low. Brazil, in contrast,

largely conforms to a cold country’s characteristics.

It is a judgment call whether so many character-

istics are necessary for the purpose of classifying

countries.The level of economic development could

be used as the sole indicator, but such a classiﬁcation

would be misleading because hot countries are not

the same as industrialized countries. However, one

mustquestionwhetherreﬁnement and improvement

in the classiﬁcation process justiﬁes the extra effort

necessary to wade through all relevant characteris-

tics, especially since the level of economic develop-

ment correlates well with these characteristics. For

practicality, a short-cut appears to be desirable.

Classiﬁcation is a means to an end, and the

purpose of the country temperature gradient is to

determine which intermediary should be used in a

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given country. The temperature gradient also indi-

cates which kind of intermediary is likely to be func-

tioning in a country. In a cold country, competitive

pressures on institutional change are not dynamic.

Legal restrictions, for example, can prevent or

slow down new distribution innovations. Consider

Egypt as an example.Only persons born of Egyptian

fathers or Egyptian legal entities can represent

foreign principals. Being “comfortably cold,” mid-

dlemen see few threats to their existence. In China,

all tobacco must be sold through the China National

Tobacco Co. monopoly.

For a hot country, environmental forces may be

so hot that new institutional structures arise.

Middlemen who fail to adjust will be bypassed and

go out of existence. The survival of a channel

member is thus a function of the ability to adapt to

changing environmental conditions because the

channel member cannot hide behind local regula-

tions for protection. For example, in the United

Kingdom, either the principal or the intermediary

can terminate an agency relationship provided

reasonable notice is given.

The country temperature gradient has implica-

tions for all channel members. A foreign manufac-

turer can exercise maximum control over the

evolutionary process in the distribution channel.

The ﬁrm can rely initially on middlemen/distribu-

tors. If sales increase, the manufacturer can bypass

the intermediary by setting up a sales branch or sub-

sidiary. This is the trend being followed by foreign

liquor suppliers in the US market. These suppliers

now very much control their own destiny by being

responsible for their own distribution. E. Remy

Martin & Co. took its cognac away from Glenmore

Distillers and became its own US distributor

through its Premier Wine Merchants. Distillers Co.,

a Scottish ﬁrm, acted likewise by buying Somerset

Importers from Esmark. Pernod Ricard and Monet-

Hennessy adopted the same strategy by buying

Austin Nichols and Schieffelin, respectively.

A local manufacturer should be alert to any new

channel since the new channel may pose a threat to

this existing channel. When possible, the manufac-

turer must pre-empt the competition from using it.

Xerox was successful and secure with its direct sales

force channel – so secure that, when the Japanese

competition entered the market, Xerox was totally

unprepared. The Japanese invaded the US market

quickly and cheaply by using independent ofﬁce

equipment dealers, a channel that had been ignored

by Xerox.The Japanese ﬁrms had their own direct

sales force in large metropolitan areas, but they also

supplied their machines to such US ﬁrms as IBM,

Monroe, and Pitney Bowes, thus exploiting these

US ﬁrms’ extensive sales and distribution networks.

Xerox was forced to experiment with such alterna-

tive channels as retail stores, direct mail, and part-

time representatives.

Wholesalers, especially those involved in high-

margin, low-volume operations, are particularly

vulnerable to the threat posed by modern institu-

tions.Wholesalers can easily be bypassed if they are

successful in promoting their principals’ products.

Superscope, for example, lost the Sony franchise.

On the other hand, if wholesalers do the job poorly,

they are also likely to be eliminated or their author-

ity and responsibility reduced. Mitsubishi was so

unhappy with Chrysler’s performance that the

Japanese company developed its own independent

dealer network in order to catch up with Toyota and

Nissan.

Innovations tend to take place in a hot country

before spreading to other hot countries and ﬁnally

developing countries. Retailing innovations that

conform to this description include self-service

stores, discount houses, and supermarkets, all of

which developed initially in the USA.Hypermarche,

on the other hand, is a mass-merchandising method

developed in Europe. This retail store is an enor-

mous self-service combination of foods and general

merchandise, generally displayed in shipping con-

tainers. A single set of checkout counters is used.

This innovation has had only limited success when

introduced in the USA.

The success of an innovation is affected not only

by the country temperature gradient but also by

several other factors. A certain minimum level of

economic development is required to support any

form of outlet beyond simple retailing methods.

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General stores, a dying breed in the USA, are still

very common in many countries. Firms’ aggressive

behavior will also be a determinant of the success

of a new retailing method. Other cultural, legal, and

competitive factors play an important role too. In

developing countries, where there is plenty of low-

cost labor and where people are accustomed to

being waited on, self-service stores, discount

houses, and supermarkets are slow in gaining wide-

spread acceptance. In developed countries, by

comparison, various factors work in favor of large

modern discount stores/supermarkets, including

high population density, urbanization, literacy, and

labor costs. In addition, the high income level and

relatively even income distribution make refrigera-

tors and automobiles affordable and accommodate

infrequent shopping trips and large purchases.

CHANNEL ADAPTATION

Because the standardized approach to international

marketing strategy may not apply to distribution

strategy in foreign markets, it is imperative that

international marketers understand the distribution

structures and patterns in those markets. Toward

this end, comparative marketing analysis should

be conducted. Distribution is likely to be highly

adapted to the different conditions in Africa, Latin

America, and Asia.These regions’ government reg-

ulations as well as local customs act as a barrier to

distribution standardization.

Some channel adaptation is frequently a neces-

sity. Suspicion and privacy can limit the effective-

ness of door-to-door selling or other direct selling

methods.Avon has had to develop other distribution

methods in Japan and Thailand. Discount retailing

may not be effective in countries where there are

many middlemen handling small volumes of mer-

chandise. A traditional distribution channel may

seem inefﬁcient, but it may maximize the use of

inexpensive labor, leaving no idle resources.

A manufacturer must keep in mind that, due to

adaptation, a particular type of retailer may not

operate in exactly the same manner in all countries.

Whereas a US supermarket emphasized a low gross

margin, its foreign counterpart may have a relatively

high gross margin, emphasizing specialty goods and

imported goods to a high degree. Furthermore, the

foreign counterpart often operates a ready-to-eat

food section. Interestingly,American supermarkets,

especially those that have been converted into

superstores, have begun to do the same.

A particular distribution concept proven useful

in one country may have to be further reﬁned in

another. Although 7–11 pioneered the convenience

food store concept in Japan, the Japanese operation

has evolved into being more sophisticated than its

original counterpart in the USA. 7–11 Japan offers

its customers steaming ﬁsh cakes, canned tea, and

rice balls, while accepting payment for utility bills

and accepting orders from Tiffany’s catalog. To

provide the most popular and latest products, about

two-thirds of a typical store’s 3000 items will

change in a year.

CHANNEL DECISIONS

As in any domestic market, the international market

requires a marketer to make at least three channel

decisions: length, width, and number of channels of

distribution. Channel length is concerned with

the number of times a product changes hands among

intermediaries before it reaches the ﬁnal consumer.

The channel is considered long when a manufac-

turer is required to move its product through

several middlemen.The channel is considered short

when the product has to change hands only one or

twice. If the manufacturer elects to sell directly to

ﬁnal consumers, the channel is direct.

Channel width is related to the number of

middlemen at a particular point or step in the dis-

tribution channel. Channel width is a function of

the number of wholesalers and the different kinds

that are used, as well as a function of the number

and kind of retailers used. As more intermediaries

or more types are used at a certain point in the

channel, the channel becomes wider and more

intensive. If only a few qualiﬁed intermediaries are

needed to provide proper product support at a

particular level or at a speciﬁc location, the channel

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is selective. The product, though perhaps not avail-

able everywhere, is still carried by at least a few

qualiﬁed middlemen within the same area. Finally,

the distribution becomes exclusive if only one

intermediary of one type is used in that particular

area.

The watch industry and its distribution strategies

provides a good illustration of an industry with

various channel widths. Timex, as a low-priced,

mass-market product, is intensively distributed in

the sense that any intermediary, no matter what

kind, is allowed to carry the brand. Seiko is more

selective. Seiko, as an upper-medium-priced brand,

is sold through jewelry stores and catalog show-

rooms and is less likely to be found in discount or

drug stores. Patek Philippe, in order to promote an

image of elegance and exclusivity, limits its U.S.

outlets to 100 meticulously selected ﬁne jewelry

stores. Figure 12.5 shows that Patek Philippe

chooses a channel that enhances an image.

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CHANNELS OF DISTRIBUTION

Figure 12.5 Patek Philippe’s channel of distribution

Source:

Reprinted with permission of Henri Stern Watch Agency, Inc.

Channel width is relative. Both Seiko and Omega

employ selective distribution, though Omega is

much more selective. Omega’s tighter policy of

selective, limited distribution results in the brand

being available only in top jewelry, specialty, and

department stores. Due to the relative nature of

channel width, it is inappropriate to compare width

at the retail level with wholesale width. Because

there are many more retailers than wholesalers, the

issue of channel width applies only to a particular

distribution level rather than through distribution

levels.The degree of selectivity depends on the rela-

tive, not the absolute, number of intermediaries at

a particular distribution level. As a product moves

closer to end users, the distribution channel tends to

become broader. At a point closer to the manufac-

turer,the channel is not as broad.For example,at the

distributor level, Brother International is the exclu-

sive US distributor for Japan’s Brother Industries.

Another decision that concerns the manufacturer

is the number of distribution channels to be

used. In some circumstances, the manufacturer may

employ many channels to move its product to con-

sumers. For example, it may use a long channel and

a direct channel simultaneously. The use of dual

distribution is common if the manufacturer has

different brands intended for different kinds of con-

sumers.Another reason for using multiple channels

may involve the manufacturer setting up its own

direct sales force in a foreign market where the

manufacturer cannot remove the original channel

(e.g., agents) for strategic or legal reasons.Although

Seiko, Lassale, and Jean Lassale are all made by the

same Japanese ﬁrm, dual channels are used for these

brands. Seiko and Lassale are sold through distribu-

tors in the USA, whereas Jean Lassale is sold by the

manufacturer directly to retailers (jewelers).

DETERMINANTS OF CHANNEL TYPES

There is no single across-the-board solution for all

manufacturers’ channel decisions; yet there are

certain guidelines that can assist a manufacturer in

making a good decision. Factors that must be taken

into account include legal regulations, product

image, product characteristics, middlemen’s loyalty

and conﬂict, and local customs.

Legal regulations

A country may have speciﬁc laws that rule out the

use of particular channels or middlemen.France,for

example, prohibits the use of door-to-door selling.

Saudi Arabia requires every foreign company with

work there to have a local sponsor who receives

about 5 percent of any contract. Not surprisingly,

many Saudis, acting as agents, have become million-

aires almost overnight.

The overseas distribution channel often has to

be longer than desired. Because of government

regulations, a foreign company may ﬁnd it necessary

to go through a local agent/distributor. In China,

foreign ﬁrms cannot wholly own retail outlets, and

they cannot engage in wholesaling activities. In

addition, only fourteen foreign retail ventures

have direct import authority, forcing those without

direct import authority to add another layer of mid-

dlemen. Foreign retailers are required to operate

through joint ventures, and they can own a maxi-

mum of 65 percent of such joint ventures. It is an

Asian tradition, however, to circumvent ownership

restrictions by having silent partners who have

nothing to do with daily operations.Carrefour S.A.,

for example, essentially wholly owned its three

northeastern supermarkets – until the government

cracked down on the practice.As a result,Carrefour

was forced to transfer 35 percent of the ownership

to two domestic trading ﬁrms.

Channel width may be affected by the law as well.

In general, exclusive representation may be viewed

as a restraint of trade, especially if the product has

a dominant market position. In Germany, the

Federal Cartel Ofﬁce may intervene with exclusive

dealing and distribution requirements. Due to the

EU’s single market program, geographic barriers

between national markets have blurred, making it

possible for consumers outside national sales terri-

tories to gain greater access to products and

services. Therefore, EU antitrust authorities have

increased their scrutiny of “national” and exclusive

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sales agreements.The Treaty of Rome prohibits dis-

tribution arrangements that affect trade or restrict

competition (i.e., restrictions on territory, non-

competition clauses, and grants of exclusivity). In

fact, in the case of automobiles, the Commission has

determined that exclusive distribution limited trade

between the member countries and that manufac-

turers thus had less incentive to price cars on a

competitive basis. It has directed the manufacturers

to allow distributors to sell to other dealers and

consumers throughout the EU.

Product image

The product image desired by a manufacturer can

dictate the manner in which the product is distrib-

uted. A product with a low-price image requires

intensive distribution. On the other hand, it is

not necessary nor even desirable for a prestigious

product to have wide distribution. Clinique’s prod-

ucts are sold in only sixty-four department stores in

Japan.Waterford Glass has always carefully nurtured

its posh image by limiting its distribution to top-

ﬂight department and specialty stores.At one time,

it did not take on any retail accounts for a period of

a year. Its effort to create an air of exclusivity has

worked so well that Waterford Glass commands

a quarter of the US market, easily making it the

bestselling ﬁne crystal.

Although intensive distribution may increase

sales in the short run, it is potentially harmful to the

product’s image in the long run. This is a problem

faced by Aprica as it moves its strollers beyond

department and specialty stores into mass-market

outlets such as JCPenney and Sears. Tiffany & Co.

lost many upper-class customers when it broadened

its clientele base. Cartier, in trying to restore its

esteem, has pared its retail distribution network,

which had proliferated unwisely, by 50 percent in

the USA and 25 percent worldwide.

Product characteristics

The type of product determines how the product

should be distributed. For low-priced, high-

turnover convenience products, the requirement is

for an intensive distribution network.The intensive

distribution of ice cream is an example. Walls’

(formerly Foremost’s) success in Thailand may be

attributed in part to its intensive distribution and

channel adaptation. Walls has tailored its distribu-

tion activities to the local Thai scene by sending its

products (ice cream, milk, and other dairy prod-

ucts) into the market in every conceivable manner.

Such traditional channels as wholesalers and such

new channels as company-owned retail outlets

(modern soda fountains) and pushcarts are also

used. Pushcarts are supplied by the company and

manned by independent retailers (i.e., sidewalk

salesman) who keep a 20 percent margin. However,

traditional channels employing wholesalers, small

stores, restaurants, hotels, and schools still account

for a majority of sales.

For high-unit-value, low-turnover specialty

goods, a manufacturer can shorten and narrow its

distribution channel. Consumers are likely to do

some comparison shopping and will more or less

actively seek information about all brands under

consideration. In such cases, limited product expo-

sure is not an impediment to market success.

One should always remember that products are

dynamic, and the specialty goods of today may

be nothing more than the shopping or even conve-

nience goods of tomorrow. Consider computers,

which were once an expensive specialty product

that required a direct and exclusive channel. Since

the early 1980s, computers have become more of a

shopping good, necessitating a longer and more

intensive channel. Now computers, like TV sets, are

sold in discount stores.

Middlemen’s loyalty and conﬂict

One ingredient for an effective channel is satisﬁed

channel members.As the channel widens and as the

number of channels increases, more direct compe-

tition among channel members is inevitable. Some

members will perceive major competing members

and self-service members as being unfair. Some

members will blame the manufacturer for being

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motivated by greed when setting up a more inten-

sive network. In effect, intensive distribution

reduces channel members’ cooperation and loyalty

as well as increasing channel conﬂict. Michelin has

been accused of undercutting its own dealers in the

US market by not only expanding its dealer network

by 50 percent but also adding a direct channel to

take national accounts away from dealers. Both

actions increased price competition and reduced

dealers’ loyalty.Apple’s problems in Japan were due

in part to its addition of new channels, even though

it already had a major distributor.

One survey measured cooperative decisions

involving export managers from the USA and Peru,

during a sequence of three simulated interactions

with business partners. During the initial stage of

the relationship, decisions of Peruvian export man-

agers reﬂect less trust than do those of their

American counterparts. During the second stage,

Peruvian exporters respond differently to weak

cheating. Results generally are consistent with cul-

tural differences in attitudes toward in-group versus

out-group members. However, inﬂuence of cultural

differences gradually erodes in favor of personal

characteristics and relationship-speciﬁc history.

Therefore, cultural differences between business

partners decline in importance as they get to know

each other.

Local customs

Local business practices, whether outmoded or not,

can interfere with efﬁciency and productivity and

may force a manufacturer to employ a channel of

distribution that is longer and wider than desired.

Because of Japan’s multitiered distribution system,

which relies on numerous layers of middlemen,

companies often ﬁnd it necessary to form a

joint venture with a Japanese ﬁrm, such as Pillsbury

with Snow Brand, Xerox with Fuji, and KFC with

Mitsubishi. Japan’s many-layered distribution

system is not entirely unique in that part of the

world, since the custom in many Far-Eastern coun-

tries is to have multiple intermediary markups on

imported goods. Yet the rule of thumb in Hong

Kong is that there should be no more than two

layers between a US exporter of ﬁnished goods and

Hong Kong consumers, usually consisting of an

importer, agent retailer, or distributor.

Domestic customs can explain why a particular

channel is in existence.Yet customs may change or

be overcome, especially if consumer tastes change.

For example, there are some 82,000 British pubs,

50,000 of which are owned by brewing companies;

the problem they face is the trend toward beer con-

sumption at home. The pubs have had to adjust by

emulating trendy American bars, selling more wine

and food such as hamburgers.

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CHANNELS OF DISTRIBUTION

Prêt à Manger, a British sandwich maker, has

expanded into overseas markets.The New York expan-

sion started in 2000 and won wide acclaim.To appeal

to Americans, the company offers cookies and bagels

while adding cream cheese to its standard smoked

salmon sandwich. The operations in Hong Kong pose

a bigger challenge. Because people in Hong Kong are

not so keen on very strong cheeses, the Hong Kong

branches make fewer of them or none at all.To intro-

duce a local ﬂavor, the company has a bigger ﬁsh,

pork, and seafood offering.

The Chinese usually do not like cold dishes. Even

when a dish is served cold, the food has been heated

ﬁrst.That explains why Delifrance and Oliver’s have a

growing selection of hot food along with their sand-

wiches. At lunchtime, their customers tend to buy at

least one hot item (e.g., a curry puff at Delifrance or

pasta at Oliver’s).This kind of local preference makes

Prêt consider selling soup in Hong Kong.

Source:

“U.K. Sandwich Maker Aims for Its Own Slice of

Hong Kong Market,”

Asian Wall Street Journal

, October 31,

2001.

MARKETING STRATEGY 12.1 HOT AND COLD