Discussion Exercises

Discussion Questions

Chapter 12 Distribution Strategies: Channels of Distribution

  1. Distinguish between direct and indirect selling channels. What are the advantages and disadvantages of these channels?

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Indirect selling is employed when a manufacturer in the United States, for example, markets its product through another U.S. firm that acts as the manufacturer's sales intermediary. There are several advantages to be gained by employing an indirect domestic channel. The channel is simple and inexpensive. The manufacturer incurs no start-up cost for the channel and is relieved of the responsibility of physically moving the goods overseas. Since the intermediary very likely represents several clients who can help share distribution costs, the costs for moving the goods are further reduced.

An indirect channel also has limitations. The manufacturer has to give up control over the marketing of its product to another firm. The channel may not be permanent because the intermediary can easily discontinue handling a manufacturer's product if there is no profit.

Direct selling is employed when a manufacturer develops an overseas channel so that it deals directly with a foreign party without going through an intermediary in the home country. One advantage gained in using the direct selling channel is active market exploitation. Another advantage is greater control. The channel also improves communication and consistency.

Direct selling, however, is a difficult channel to manage if the manufacturer is unfamiliar with the foreign market. It is time consuming and expensive.

  1. Explain these types of direct-channel intermediaries: foreign distributor and state-controlled trading company.

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A foreign distributor is a foreign firm that has exclusive rights to carry out distribution for a manufacturer in a foreign country or specific area. The distributor purchases merchandise from the manufacturer at a discount and then resells or distributes the merchandise to retailers and sometimes final consumers.

A state-controlled trading company is a company that has a complete monopoly in the buying and selling of goods. Being government sanctioned and controlled for trading in certain goods, buyers of state-controlled trading companies are very definitely influenced by their governments' trade policies and politics.

  1. Explain these types of indirect-channel agents: EMC, cooperative exporter, and purchasing agent.

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An export management company (EMC) manages, under contract, the entire export program of a manufacturer. It functions as an export department for several allied but non-competing manufacturers.

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.

A purchasing agent represents the foreign buyer. This agent resides and conducts business in the exporter's country and seeks a product that matches the foreign principal's preferences and requirements.

  1. Explain these types of indirect-channel merchants: export merchant, export drop shipper, export distributor, and trading company.

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An export merchant seeks out needs in foreign markets and makes purchases from manufacturers in its own country to fill those needs. After having the merchandise packed and marked to specifications, the export merchant resells the goods in its own name.

An export drop shipper is a special kind of export merchant. It requests a manufacturer to "drop ship" a product directly to the overseas customer.

An export distributor deals with the manufacturer on a continuous basis and 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 the foreign sale.

A trading company trades on its own account. It performs many functions. It may buy and sell as a merchant. It may handle goods on consignment, or it may act as a commission house for some buyers.

  1. Explain hot, moderate, and cold countries as classified by the country temperature gradient. What are the channel implications of this classification system?

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The classification is based on these environmental characteristics:

  1. political stability
  2. market opportunity
  3. economic development and performance
  4. cultural unity
  5. legal barriers/restrictions
  6. physiographic barriers
  7. geocultural distance.

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 moderate one is medium on all seven characteristics.

The channel implications of this classification are that marketers must be alert to any new channel development in hot countries. Unlike cold countries, hot countries force marketers to change with the environment. For a hot country, environmental forces may be so hot that new institutional structures arise. Both the manufacturer and middlemen will need to adjust in order to survive.

  1. What are the factors that affect the length, width, and number of marketing channels?

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Factors that must be taken into account include legal regulations, product image, product characteristics, intermediary's loyalty and conflict, and local customs. A country may have specific laws that rule out the use of particular channels or middlemen. A product with a low-price image requires intensive distribution. So do low-priced, high-turnover, convenience products. As the channel widens and as the number of channels increases, price competition increases and dealers' loyalty is reduced. Finally, local customs may force a manufacturer to employ a channel of distribution that is longer and wider than desired.

  1. Why is it difficult — financially and legally — to terminate the relationship with overseas middlemen? What should be done to prevent or minimize such difficulties?

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Based on the assumption that an agent or distributor has invested considerable effort and money to develop the local market for the principal, many countries have enacted agency termination laws to protect the interests of agents and distributors. Such laws have a tendency to penalize unilaterally foreign principals that have terminated the agency relationships. These laws often forbid a manufacturer from terminating its relationship with even incompetent channel members without a lengthy notice in advance or without an expensive settlement.

To minimize risk and problems, the principal should carefully structure the representation agreement, making sure that certain contract terms are included in writing. The agreement must identify the parties and state their business, residences, and a time period during which the agreement will be operative. The agreement should set forth the benefits to and the rights and obligations of both parties. The jurisdiction to handle any legal disputes and the arbitration body or forum should be included. Finally, foreign laws must be considered to avoid including invalid clauses.

  1. What are gray market products? Are they legal?

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Gray market products are those imported by an unauthorized party. Gray marketing may be illegal in the case that the protection is granted to an independent American trademark owner. In general, however, it is legal to import and sell gray market goods.