Unit 8

Question 1

Distribution Policy

Answer 1

Basic options for a company’s distribution policy can be further classified according to the industrial organization types: “market cooperation” vs “integration/hierarchy.” Direct distribution schemes are considered integrative, as they establish a straight-forward hierarchy between producer and consumer. Indirect distribution systems, using legally and economically autonomous intermediaries, can be classified as market cooperations if the intermediaries’ contracts with the producers do not go beyond sales (i.e. they are not in any other contractual relationships with producers). Between these two types of transactions, there exists a broad range of vertical cooperation models for distribution.

Question 2

Why vertical Integration is good

Answer 2

Vertical integration (in the sense of expanding the depth of added value while focusing on the sales market) is one feature of integrative distribution systems. The producers are not only in direct contact with the final customers in terms of communication but also in terms of distribution. In an international context, this can have positive effects when a company wants to guarantee a certain image in foreign markets, its products or services need explanation, the company wants to avoid knowledge drain, or intends to locally realize specific services. Indirect distribution systems may initially help to save costs, however, they may also entail losses of control and dependencies on intermediaries. Furthermore, the company is not very close to the local customers, which is especially problematic when the sales markets are far away, either geographically or culturally (Meffert & Bolz, 1998).

Question 3

a case for cooperative distribution

Answer 3

In an international context, cooperative distribution strategies provide the opportunity to increase a company’s influence on the final customers and realize cost advantages in the distribution channels. Such strategies focus on the cooperation between producers and distribution partners, pursuing goals such as strengthening business relationships, cost-relat​ed or efficiency-related objectives (synergy effects in supply chain management or market cultivation) or increasing customer loyalty on each of the domestic markets (strengthening the brand locally).

Question 4

horizontal selection

Answer 4

horizontal selection entails deciding on the number and type of intermediaries for each of these stages. Horizontal selection may, depending on the number of intermediaries for Skandisun, result in a universal distribution system (whereby the company accepts every intermediary), selective distribution (where selected intermediaries are engaged), or exclusive distribution (where only a few intermediaries are selected according to strict criteria).

Question 5

Indirect distribution strategy and its advantages

Answer 5

When adopting an indirect distribution policy, the company sells its products to intermediaries such as wholesalers and retailers. There are two options here: the company either directly delivers its product to retailers who sell the product to consumers or it delivers its product to wholesalers who in turn distribute the product to retailers.

For the Skandisun, the advantages of this policy include the following:

Sunshine benefits from the trade sector’s distinct market knowledge and the retailers handle some of the advertising.
The company has to deal with fewer clients (i.e. the retailers and wholesalers instead of each consumer) who are then responsible for generating sales.
Field service only has to be developed to a limited extent.

Question 6

Key difference between indirect distribution through the use of a wholesaler and a Retailer

Answer 6

The advantages of indirect distribution through wholesalers are even greater than indirect distribution through retailers because the wholesaler handles advertising completely as well as the major part of distribution.

Question 7

Disadvantages of indirect distribution

Answer 7

As a result of limited contact with the actual consumers and limited market presence, Sunshine GmbH might not be aware of relevant changes in the market affecting the company or its products (e.g. when and why consumers turn to specific forms of energy).
There is also a risk that one or several retailers demand an exclusive license to sell the product, in the sense of exclusive supply contracts. This would create a considerable dependency for Sunshine on a few companies, to the extent where Sunshine could become no more than a basic supplier.

Question 8

Multi Channel Strategy

Answer 8

Multi-channel strategies are very common today. Under such a strategy, the Skandisun would be sold both directly and also through various different indirect distribution channels.

Question 9

Indirect Export

Answer 9

One of the primary advantages of using indirect export methods to distribute products is that initiating customer contact, order acquisition, and supply are carried out by intermediary third parties who are, in essence, legally and economically separate from the company. However, the strategy of marketing products via an intermediary, who is often working for several different companies, entails the risk that the quality of customer consulting and service decreases, as the intermediary naturally operates according to their own priorities. Different types of distribution agents may be engaged as intermediaries such as domestic export trading companies or branch offices for domestic trading firms (e.g. general trading firms). Often, these companies can offer distinct knowledge of the market and the industry.

Question 10

Direct Export

Answer 10

y contrast, direct export means that the exporting company sells its products on foreign markets without engaging intermediaries. Direct export has the following advantages in comparison to indirect export: 1) the company is able to ensure that its own concept of quality is delivered and 2) the company is in a better position to protect its immaterial assets (Root, 1994). Not engaging an intermediary, however, may be more expensive if the internationalizing company decides to directly invest into distribution infrastructure on the foreign market

Question 11

export directly but do not invest directly.

Answer 11

In the following cases, companies export directly but do not invest directly.

+The company delivers its products directly to consumers abroad.

+The company delivers its products to a foreign importer who then sells the products to customers.

Question 12

Companies exporting directly and opting for direct investments on the foreign country markets, may choose one of the following organizational forms for their operations:

Answer 12

n most cases, representative offices involve only a low level of direct investment in the foreign markets. Individual company employees represent the company’s concerns abroad, monitor the market, initiate and maintain business contacts, and carry out acquisition activities.

Branch offices often evolve from representative offices and usually have more extensive decision-making powers.

Sales offices are the most capital-intensive type of direct exporting, as they store the goods sold on the foreign markets and carry out maintenance and service features.

Question 13

Granting License

Answer 13

When an international company grants a license for a specific foreign market, the foreign license holder pays a fee for the right to use patents, utility models, registered designs, trademarks, and expertise (Berndt, Fantapié Altobelli, & Sander, 2005). Compared to direct export, this is often a less expensive option for the company. As a company within the targeted market is involved in this type of market entry, the problem of cultural differences can almost be completely resolved. However, this approach also has a major deficit: the transferring of specific knowledge about products and processes to the licensee carries with it the risk of imitation.

Question 14

Pivotal difference between franchising and licensing

Answer 14

Franchising has a lot in common with licensing. The pivotal difference is that the franchisor is granted an extensive, stipulated right of direction and control. While franchising is similar to licensing in terms of probability of success and transactional parameters, it is linked to tighter control mechanisms.

Question 15

Joint Ventures

Answer 15

Joint ventures are an organizational form that many industries favor when conducting international business. There are different types of joint ventures. In extreme cases, joint ventures encompass all activities of a company, which leads to significant capital needs. However, joint ventures do not only necessitate investments in physical, capital, and human resources, but also result in major coordination efforts, which again require resources. In international business, many markets are tapped through joint ventures. One important reason for this is that many countries only tolerate and support activities of foreign companies when they do so in the form of a joint venture. However, especially in the case of developing and emerging countries, engaging in joint ventures carries the risk that the foreign partners entering a national market will consider the joint venture as an opportunity to tap production and process know-how for their own subsequent use.

Question 16

Subsidiary

Answer 16

Another option is to found a subsidiary in the foreign market. Subsidiaries are legally considered autonomous and thus liable for the capital invested abroad. In the case of branch offices, the mother company can be held liable (Berndt, Fantapié Altobelli, & Sander, 2005). Founding a subsidiary is the most capital-intensive way of entering into and developing international markets; however, it also ensures sustained control over foreign business activities. A subsidiary may either be newly founded or acquired. Acquisitions usually result in much higher costs but have two fundamental advantages

Market entry is quicker.
Market development is more efficient and more effective as the company can fall back on an existing network of relationships.

Question 17

Contract Marketing

Answer 17

Contract manufacturing means that an international company tasks a foreign partner with managing specific parts of the overall production process. The foreign partner is provided with information on the type, quality, and technical procedure of the production steps to be completed. Usually, the international company reserves the right to market the produced goods.

Question 18

Innovative Organizational Forms

Answer 18

Given that small and medium-sized companies often reach their limits very early in the internationalization processes, innovative organizational forms for international market development are usually based on a cooperative approach. The companies jointly tap foreign markets with one or several partners. Such cooperation often serves to close resource gaps. In this regard, cooperation is not only a type of market entry but also an approach that provides the resources needed for internationalization. Cooperation can thus be considered an instrument for facilitating and accelerating the development of new national markets. Another advantage of cooperation is that while the cooperation is often kept flexible, the partners nevertheless share the business risk (Bühner, 2004). However, the nonbinding element of the cooperation also entails disadvantages: the quality of the cooperation strongly depends on the commitment of the individual members to focus on their individual core competencies (Kutschker & Schmid, 2008).

Cooperatively tapping foreign m

Question 19

Using the Internet successfully for international distribution depends on several critical success factors:

Answer 19

Accessibility: Target customers have to be able to access the Internet and have the skills to effectively navigate this technology. These opportunities differ considerably in the different countries.

Cultural influences: These influences will strongly influence the acceptability of Internet use in purchasing behavior. Research has shown that the popularity of teleshopping and mail orders varies according to different cultural groups; the role of the Internet is not unlimited in this respect.

Negative feedback within the distribution system: Using the Internet may result in negative feedback if the company’s foreign distribution partners are afraid that they may be replaced by online distribution channels in the medium term. This can easily occur when the Internet is used parallel to a traditional distribution system and their spheres of action (e.g. target groups, products) overlap.

Market transparency: Taking advantage of regional or national differences on interdependent markets is a major challenge of international marketing. Using the Internet can cause severe problems in that regard. One feature of the Internet is that everybody has universal access to information. By providing information about their goods and services, companies inadvertently contribute to increasing market transparency; consumers are able to gather a lot of information as they have access to the offers of many alternative suppliers. This market transparency supports external pressure to differentiate prices.

Mobile applications: Even when companies do not use the Internet as an instrument for internationalization, consumers are increasingly able to exchange information and opinions about products using social media applications. The development of the Internet into more interactive forms has taken away companies’ exclusive control over product and price information. Consumers do not necessarily need information from companies as they get, and many times prefer, relevant data from other consumers. This serves also to increase market transparency and puts pressure on producers to adequately respond to the preferences of consumers.

Costs: An economic analysis of using the Internet as a distribution channel must consider both positive revenue-related effects and also the costs of maintaining a competitive web­site. These costs are often grossly inferior in contrast with the costs of developing a traditional distribution and partner network with comparable market coverage. However, an economic analysis shows that websites have to be planned, implemented, and controlled in a systematic fashion, just as with any other marketing tool.
Practice Quiz