Distribution Channels: Strategies and Market Access
Distribution Policy and Channels
The main challenge in distribution policy lies in the dispersed locations where goods must be retrieved. This necessitates the creation of efficient distribution channels.
Choosing a Distribution Channel
Several factors influence the choice of distribution channel:
- Market Entry Strategy: The chosen market entry method will significantly impact the distribution policy.
- Desired Level of Control: Maintaining control over distribution, including aspects like transportation and partners, is crucial. Even without direct control, access to information remains essential.
- Information: Gathering information on intermediary margins, their target segments, and relevant distribution regulations is vital for informed decision-making.
Understanding these factors enables better distribution channel selection.
Perspectives on Distribution Channels
There are two key perspectives on distribution channels:
- Commercial: This perspective focuses on the agents involved, such as retailers and wholesalers, with whom the company interacts.
- Logistical: This perspective encompasses all transport-related processes, including order processing, documentation, and transportation itself.
A distribution channel represents the circuit through which producers make their products available for consumers to purchase. It originates with the producer and ends with the consumer, with intermediaries facilitating the product’s movement.
Channel Length
Distribution channels can be categorized by their length:
- Long Channel: Involves both wholesalers and retailers (at minimum). This is suitable for companies with limited market knowledge, smaller businesses, introductory phases, or highly fragmented markets.
- Advantages: Lower costs, economies of scale in transportation.
- Disadvantages: Limited market knowledge, less control over distribution.
- Short Channel: Bypasses the wholesaler, distributing directly to retailers or distribution centers. Common in international trade within the EU.
- Advantages: Increased market contact, elimination of trade margins.
- Disadvantages: Higher distribution costs, increased administrative expenses.
- Direct Channel: Products move directly from manufacturer to consumer. Often used for large equipment or niche products.
Types of Agents
- Wholesalers: Typically large, well-managed companies offering superior service and high turnover.
- Retailers: Characteristics vary depending on the market, adapting to local culture, income levels, and other factors.
Distribution Strategies
- Intensive Distribution: Aims for maximum retail outlet coverage, ensuring product availability and high visibility, particularly for consumer products.
- Selective Distribution: Uses a smaller number of retail outlets, focusing on selected retailers for non-everyday products, emphasizing differentiation.
- Exclusive Distribution: Reserved for high-end items, utilizing very specific stores and offering a select group of retailers exclusive rights to distribute the product, maximizing differentiation.
Market Access Strategies
Market entry typically begins with low-commitment approaches, minimizing resource allocation and risk. Commitment increases as market knowledge grows.
Exporting
Exporting represents a low-commitment, low-risk entry strategy, often the first step in internationalization. It benefits from government support.
Types of Exporting:
- Indirect: Utilizing agents or trading companies to manage export processes.
- Direct: Selling directly from the home market to an importer, offering greater control and profit potential but requiring more management.
- Direct Sales: Utilizing a representative in the destination country to sell directly to end customers, commonly used for industrial products and machinery.
- Agents and Distributors: Engaging distributors or agents to handle product distribution. Distributors act as customers, while agents are contracted specifically for export, often specializing in a particular market or product. Factors to consider when selecting agents or distributors include market knowledge, market share, geographic coverage, size, experience, after-sales service capabilities, and language skills. Resources like ICEX and chambers of commerce can help identify potential partners. Contracts with agents and distributors should be carefully reviewed, considering the legal framework of the destination country. Maintaining fluid communication is crucial.
- Establishing a Business Subsidiary: Setting up a branch or subsidiary in the destination country to manage orders and distribution. This offers greater control and streamlined processes but involves higher costs. It is generally recommended after gaining market experience through agents or distributors.
- Export Concentration: Collaborating with other manufacturers or distributors for export. This can involve piggybacking on another company’s established distribution channels or establishing international franchises.
Manufacturing in Foreign Markets
- Contract Manufacturing: Hiring a company in the destination market to manufacture the product. This avoids equipment investment and offers a safer entry into uncertain markets but carries the risk of nurturing a future competitor.
- Manufacturing License: Licensing a company to manufacture and handle distribution, promotion, etc., for a fee.
- Establishing a Production Center: Setting up a factory in the destination market. This is the most expensive and risky approach but offers the highest potential rewards, including access to local market knowledge and the advantage of national production.