Distribution decisions

Transcription

1 16 Contents 16.1 Introduction 16.2 Externa determinants of channe decisions 16.3 The structure of the channe 16.4 Managing and controing distribution channes 16.5 Managing ogistics 16.6 Impications of the Internet for distribution decisions 16.7 Specia issue 1: Internationa retaiing 16.8 Specia issue 2: Grey marketing (parae importing) 16.9 Summary Case studies 16.1 De Beers 16.2 Nokia 16.3 Video case study: DHL Learning objectives After studying this chapter you shoud be abe to do the foowing: Expore the determinants of channe decisions. Discuss the key points in putting together and managing goba marketing channes. Discuss the factors infuencing channe width (intensive, seective or excusive coverage). Expain what is meant by integration of the marketing channe. Describe the most common export documents. Define and expain the main modes of transportation. Expain how the internationaisation of retaiing affects the manufacturer. Define grey markets and expain how to dea with them Introduction Access to internationa markets is a key decision area facing firms into the 2000s. In Part III we considered the firm s choice of an appropriate market entry mode that coud assure the entry of a firm s products and services into a foreign market. After the firm has chosen a strategy to get its products into foreign markets the next chaenge (and the topic of this chapter: see Figure 16.1) is the distribution of the products 506

2 Chapter 16 Figure 16.1 Channe decisions within those foreign markets. The first part of this chapter concerns the structure and management of foreign distribution. The second part is concerned with the management of internationa ogistics. According to Tabe 16.1, distribution channes typicay account for per cent of the retai price of goods and services in an industry. Over the next few years the chaenges and opportunities for channe management wi mutipy, as technoogica deveopments acceerate channe evoution. Data networks are increasingy enabing end users to bypass traditiona channes and dea directy with manufacturers and service providers. Eectronic data interchange is now used for the exchange of orders and invoices between suppiers and their customers. By onine monitoring of stocks customers are aso abe to order directy from suppiers on a just-in-time basis, and thereby to avoid hoding stock atogether or to minimize the time it is hed. Tabe 16.1 Vaue added in the vertica chain (% of retai price, estimated) Actor in the vertica chain Cars Software Petro Laser Packaged printers goods Suppier of raw materias/components Manufacturer of finished goods Distribution channe Tota Source: Buckin et a., 1996, p The figures in the tabe are based on research conducted by, among others, the Economist Inteigence Unity and McKinsey. 507

3 Part IV Designing the goba marketing programme At the same time new channes are continuing to emerge in one industry after another, opening up opportunities for companies to cut costs or improve their effectiveness in reaching specific market segments. Cataogue retaiing, teephone ordering, cabe TV shopping and Internet ordering are a becoming increasingy important to consumer goods manufacturers. Despite the scae and importance of these opportunities, however, few companies manage to take fu advantage of them. The foowing presents a systematic approach to the major decisions in internationa distribution. The main channe decisions and their determinants are iustrated in Figure Distribution channes are the inks between producers and fina customers. In genera terms, an internationa marketer distributes either directy or indirecty. As we saw in Chapter 10, direct distribution amounts to deaing with a foreign firm, whie the indirect method means deaing with another home country firm that serves as an intermediary. Figure 16.1 shows that the choice of a particuar channe ink wi be strongy infuenced by various characteristics of the host markets. We wi now consider these in more detai Externa determinants of channe decisions Customer characteristics The customer, or fina consumer, is the keystone in any channe design. Thus the size, geographic distribution, shopping habits, outet preferences and usage patterns of customer groups must be taken into account when making distribution decisions. Consumer product channes tend to be onger than industria product channes because the number of customers is greater, the customers are more geographicay dispersed, and they buy in smaer quantities. Shopping habits, outet preferences and usage patterns vary consideraby from country to country and are strongy infuenced by sociocutura factors. Nature of product Product characteristics pay a key roe in determining distribution strategy. For owpriced, high-turnover convenience products, the requirement is an intensive distribution network. On the other hand it is not necessary or even desirabe for a prestigious product to have wide distribution. In this situation a manufacturer can shorten and narrow its distribution channe. Consumers are ikey to do some comparison shopping and wi activey seek information about a brands under consideration. In such cases imited product exposure is not an impediment to market success. Transportation and warehousing costs of the product are aso critica issues in the distribution and sae of industria goods such as buk chemicas, metas and cement. Direct seing, servicing and repair, and spare parts warehousing dominate the distribution of such industria products as computers, machinery and aircraft. The product s durabiity, ease of aduteration, amount and type of customer service required, unit costs and specia handing requirements (such as cod storage) are aso significant factors. Nature of demand/ocation The perceptions that the target customers hod about particuar products can force modification of distribution channes. Product perceptions are infuenced by the 508

4 Chapter 16 customer s income and product experience, the product s end use, its ife cyce position and the country s stage of economic deveopment. The geography of a country and the deveopment of its transportation infrastructure can aso affect the channe decision. Competition The channes used by competing products and cose substitutes are important because channe arrangements that seek to serve the same market often compete with one another. Consumers generay expect to find particuar products in particuar outets (e.g. speciaity stores), or they have become accustomed to buying particuar products from particuar sources. In addition, oca and goba competitors may have agreements with the major whoesaers in a foreign country that effectivey create barriers and excude the company from key channes. Sometimes the aternative is to use a distribution approach totay different from that of the competition and hope to deveop a competitive advantage. Lega reguations/oca business practices A country may have specific aws that rue out the use of particuar channes or intermediaries. For exampe, unti recenty a acohoic beverages in Sweden and Finand had to be distributed through state-owned outets. Other countries prohibit the use of door-to-door seing. Channe coverage can aso be affected by aw. In genera, excusive representation may be viewed as a restraint of trade, especiay if the product has a dominant market position. EU antitrust authorities have increased their scrutiny of excusive saes agreements. The Treaty of Rome prohibits distribution agreements (e.g. grants of excusivity) that affect trade or restrict competition. Furthermore, oca business practices can interfere with efficiency and productivity and may force a manufacturer to empoy a channe of distribution that is onger and wider than desired. Because of Japan s mutitiered distribution system, which reies on numerous ayers of intermediaries, foreign companies have ong considered the compex Japanese distribution system as the most effective non-tariff barrier to the Japanese market. Exhibit 16.1 shows how the Japanese distribution system differs from its counterparts in the United States and Europe. Exhibit 16.1 The distribution system in Japan The distribution network in Japan has more whoesaers and retaiers per capita than any other industria nation (Onkvisit and Shaw, 1993, p. 598). Figure 16.2 iustrates the difference between shorter US channes and the ong and compex Japanese channes. A consequence of the more compex Japanese distribution system is the considerabe price escaation from producer to consumer, as shown in Figure (The principe behind price escaation is shown in Tabe 15.1.) The first transaction in Figure 16.3, from producer to whoesaer, is a vertica exchange, whereas the next transaction (from one whoesaer to another) is a horizonta exchange. Sma Japanese distributors often ack adequate inventory to serve another distributor at the same vertica eve (i.e. horizonta exchange). According to economic criteria, the Japanese distribution system woud seem to be inefficient, resuting in higher consumer prices. Ë 509

5 Part IV Designing the goba marketing programme Exhibit 16.1 continued Figure 16.2 Comparison of distribution channes in car parts between Japan and the USA Source: Cateora, 1993, Internationa Marketing, 8th Edition, p Reproduced with kind permission of the McGraw-Hi Companies. However, the compex Japanese distribution system exists to serve socia as we as economic purposes. Channe members are ike famiy members and their reationships to each other are tighty interocked by tradition and emotion. Because of these socia considerations inefficient channe members are sometimes retained and toerated in order to maintain empoyment and income fows. For exampe, one of the primary concerns of Japanese channe managers is to hep other channe members preserve their dignity. Going out of business is viewed as disgracefu, so stronger channe members (typicay producers) must often support weak distributors. The Japanese system is often seen as a trade barrier by western firms, but it is ikey that these foreign firms have merey faied to understand the system. Sources: Cateora (1993); Onkvisit and Shaw (1993); Pirog and Lancioni (1997). 510

6 Chapter 16 Figure 16.3 A hypothetica channe sequence in the Japanese consumer market Source: Pirog and Lancioni, 1997, p. 57. Adapted with kind permission from Internationa Journa of Physica Distribution and Logistics Management, Emerad Group Pubishing Ltd. Let us now return to the major decisions concerning the structure of the distribution channe (Figure 16.1) The structure of the channe Market coverage Coverage can reate to geographica areas or number of retai outets. Three approaches are avaiabe: intensive, seective or excusive coverage. Market coverage The amount of market coverage that a channe member provides is important. Coverage is a fexibe term. It can refer to geographica areas of a country (such as cities and major towns) or the number of retai outets (as a percentage of a retai outets). Regardess of the market coverage measure(s) used the company has to create a distribution network (deaers, distributors and retaiers) to meet its coverage goas. As shown in Figure 16.4, three different approaches are avaiabe: 1 Intensive coverage. This cas for distributing the product through the argest number of different types of intermediary and the argest number of individua intermediaries of each type. 2 Seective coverage. This entais choosing a number of intermediaries for each area to be penetrated. 3 Excusive coverage. This invoves choosing ony one intermediary in a market. Channe coverage (width) can be identified aong a continuum ranging from wide channes (intensive distribution) to narrow channes (excusive distribution). Figure 16.5 iustrates some factors favouring intensive, seective and excusive distribution. 511

7 Part IV Designing the goba marketing programme Figure 16.4 Three strategies for market coverage Source: Lewison, 1996, p Figure 16.5 Factors infuencing channe width Source: adapted from Lewison, 1996, p

8 Chapter 16 Channe ength Number of eves (middemen) in the distribution channe. Channe ength This is determined by the number of eves or different types of intermediaries. Longer channes, those with severa intermediaries, tend to be associated with convenience goods and mass distribution. As seen in Exhibit 16.1, Japan has onger channes for convenience goods because of the historica deveopment of its system. One impication is that prices increase consideraby for the fina consumer (price escaation: see section 15.3). Contro/cost The contro of one member in the vertica distribution channe means its abiity to infuence the decisions and actions of other channe members. Channe contro is of critica concern to internationa marketers wanting to estabish internationa brands and a consistent image of quaity and service wordwide. The company must decide how much contro it wants to have over how each of its products is marketed. The answer is party determined by the strategic roe assigned to each market. It is aso a function of the types of channe member avaiabe, the reguations and rues governing distribution activity in each foreign market, and to some extent the roes traditionay assigned to channe members. Normay a high degree of contro is provided by the use of the firm s own saes force in internationa markets. The use of intermediaries wi automaticay ead to oss of some contro over the marketing of the firm s products. An intermediary typicay performs certain functions: carrying of inventory; demand generation, or seing; physica distribution; after-saes service; extending credit to customers. In getting its products to end-user markets a manufacturer must either assume a of these functions or shift some or a of them to intermediaries. As the od saying goes, You can eiminate the intermediary, but not the functions of the intermediary. In most marketing situations there is a trade-off between a producer s abiity to contro important channe functions and the financia resources required to exercise that contro. The more intermediaries invoved in getting a suppier s product to user customers, the ess contro the suppier can generay exercise over the fow of its product through the channe and the way it is presented to customers. On the other hand, reducing the ength and breadth of the distribution channe usuay requires that the suppier perform more functions itsef. In turn this requires the suppier to aocate more financia resources to activities such as warehousing, shipping, credit, fied seing or fied service. In summary, the decision to use an intermediary or to distribute via a companyowned saes force requires a major trade-off between the desire to contro goba marketing efforts and the desire to minimise resource commitment costs. Degree of integration Contro can aso be exercised through integration. Channe integration is the process of incorporating a channe members into one channe system and uniting them under one eadership and one set of goas. There are two different types of integration: 513

9 Part IV Designing the goba marketing programme Figure 16.6 Vertica integration Vertica integration Seeking contro of channe members at different eves of the channe, e.g. the manufacturer s acquisition of the distributor. Horizonta integration Seeking contro of channe members at the same eve of the channe, e.g. the manufacturer s acquisition of the competitor. 1 vertica integration: seeking contro of channe members at different eves of the channe; 2 horizonta integration: seeking contro of channe members at the same eve of the channe (i.e. competitors). Integration is achieved either through acquisitions (ownership) or through tight cooperative reationships. Getting channe members to work together for their own mutua benefit can be a difficut task. However, today cooperative reationships are essentia for efficient and effective channe operation. Figure 16.6 shows an exampe of vertica integration. The starting point in Figure 16.6 is the conventiona marketing channes, where the channe composition consists of isoated and autonomous participating channe members. Channe coordination is here achieved through arm s-ength bargaining. At this point, the vertica integration can take two forms forward and backward. The manufacturer can make forward integration when it seeks contro of businesses of the whoesae and retai eves of the channe. The retaier can make backward integration, seeking contro of businesses at whoesae and manufacturer eves of the channe. The whoesaer has two possibiities: both forward and backward integration. The resut of these manoeuvres is the vertica marketing system (Figure 16.6). Here the channe composition consists of integrated participating members, where channe stabiity is high due to assured member oyaty and ong-term commitments Managing and controing distribution channes In the beginning of a market entry, partnerships with oca distributors make good sense: Distributors know the distinctive characteristics of their market, and most customers prefer to do business with oca partners. Arnod (2000) propose the foowing guideines to the internationa marketer (manufacturer) in order to anticipate and correct potentia probems with internationa distributors: 514

10 Chapter 16 Seect distributors do not et them seect you: Typicay, manufacturers are approached by potentia distributors at internationa fairs and exhibitions, but the most eager potentia distributors are often the wrong peope to partner with. Look for distributors capabe of deveoping markets, rather than those with a few obvious contacts: This means sometimes bypassing the most obvious choice the distributor who has the right customers and can generate quick saes in favour of a partner with a greater wiingness to make ong-term investments and an acceptance of an open reationship. Treat the oca distributors as ong-term partners, not temporary market-entry vehices: Many companies activey signa to distributors that their intentions are ony for the short term, drawing up contracts that aow them to buy back distribution rights after a few years. Under such a short-term agreement the probem is that the oca distributor does not have much incentive to invest in the necessary ong-term marketing deveopment. Support market entry by committing money, managers, and proven marketing ideas: Many manufacturers are reuctant to commit resources at the eary stages of a market entry. However, to retain strategic contro, the internationa marketer must commit adequate corporate resources. This is especiay true during market entry, when companies are east certain about their prospect in new countries. From the start, maintain contro over marketing strategy: An independent distributor shoud be aowed to adapt the manufacturer s strategy to oca conditions. However, ony companies providing soid eadership for marketing wi be in a position to expoit the fu potentia of a goba marketing network. Make sure distributors provide you with detaied market and financia performance data: Most distributors regard data ike customer identification and oca price eves as key sources of power in the reationship with the manufacturer. But the manufacturer s abiity to expoit its competitive advantages in the internationa market depends heaviy on the quaity of information it obtains from the market. Therefore a contract with the distributor must incude the exchange of such information, ike detaied market and financia performance data. Buid inks among nationa distributors at the eariest opportunity: The inks may take form of creating an independent nationa distributor counci or a regiona corporate office. The transfer of ideas within oca markets can improve performance and resut in greater consistency in the execution of internationa marketing strategies because inks to other nationa distributor networks coud be estabished. This coud ead to a cross-nationa transfer of efficient marketing toos. Once the basic design of the channe has been determined the internationa marketer must begin to fi it with the best avaiabe candidates, and must secure their cooperation. Screening and seecting intermediaries Figure 16.7 shows the most important criteria (quaifications) for seecting foreign distributors, grouped in five categories. After isting a important criteria (ike in Tabe 16.1), some of these must then be chosen for a more specific evauation, where the potentia candidates are compared and contrasted against determining criteria. The exampe in Tabe 16.2 uses the first two criteria in each of Tabe 16.1 s five categories for screening potentia channe members, in tota ten criteria. The specific criteria to be used depend on the nature of a firm s business and its distribution objectives in given markets. The ist of criteria shoud correspond cosey to the 515

11 Part IV Designing the goba marketing programme Figure 16.7 Criteria for evauating foreign distributors Source: Adapted from Cavusgi et a. (1995). marketer s own determinants of success a the things that are important to beating the competition. The hypothetica manufacturer (a consumer packaged goods company) used in Tabe 16.2 considered the distributor s marketing management expertise and financia soundness to be of greatest importance. These indicators wi show whether the distributor is making money and is abe to perform some of the necessary marketing functions such as extension of credit to customers and risk absorption. Financia reports are not aways compete or reiabe, or may end themseves to differences of interpretation, pointing to the need for a third-party opinion. In order to make the weighting and grading in Tabe 16.2, the manufacturer must have had some persona interviews with the management of each potentia distributor. In the exampe of Tabe 16.2, Distributor 1 woud be seected by the manufacturer. Aternativey, an industria goods company may consider the distributor s product compatibiity, technica know-how and technica faciities, and service support, of high importance, and the distributor s infrastructure, cient performance and attitude towards its products of ow importance. Quite often goba marketers find that the most desirabe distributors in a given market are aready handing competitive products and are therefore unavaiabe. A high-tech consumer goods company, on the other hand, may favour financia soundness, marketing management expertise, reputation, technica know-how, technica faciities, service support and government reations. In some countries reigious or ethnic differences might make an agent suitabe for one part of the market coverage but unsuitabe for another. This can resut in more channe members being required in order to give adequate market coverage. 516

12 Chapter 16 Tabe 16.2 An exampe of distributor evauation by the use of seection criteria from Figure 16.7 Distributor 1 Distributor 2 Distributor 3 Criteria (no ranking impied) Weight Rating Score Rating Score Rating Score Financia and Company strengths: Financia soundness Abiity to finance initia saes and subsequent growth Product factors: Quaity and sophistication of product ines Product compementarity (synergy or confict?) Marketing skis: Marketing management expertise and sophistication Abiity to provide adequate geographic coverage of the market Commitment: Wiingness to invest in saes training Commitment to achieving minimum saes targets Faciitating Factors: Connections with infuentia peope (network) Working experience / reationships with other manufacturers (exporters) Score Scaes: Rating Weighting 5 Outstanding 5 Critica success factor 4 Above average 4 Prerequisite success factor 3 Average 3 Important success factor 2 Beow average 2 Of some importance 1 Unsatisfactory 1 Standard Contracting (distributor agreements) When the internationa marketer has found a suitabe intermediary a foreign saes agreement is drawn up. Before fina contractua arrangements are made it is wise to make persona visits to the prospective channe member. The agreement itsef can be reativey simpe but, given the numerous differences in the market environments, certain eements are essentia. These are isted in Figure The ong-term commitments invoved in distribution channes can become particuary difficut if the contract between the company and the channe member is not carefuy drafted. It is norma to prescribe a time imit and a minimum saes eve to be achieved, in addition to the particuar responsibiities of each party. If this is not 517

13 Part IV Designing the goba marketing programme Figure16.8 Items to incude in an agreement with a foreign intermediary (distributor) Names and addresses of both parties. Date when the agreement goes into effect. Duration of the agreement. Provisions for extending or terminating the agreement. Description of saes territory. Estabishment of discount and/or commission schedues and determination of when and how paid. Provisions for revising the commission or discount schedues. Estabishment of a poicy governing resae prices. Maintenance of appropriate service faciities. Restrictions to prohibit the manufacture and sae of simiar and competitive products. Designation of responsibiity for patent and trade mark negotiations and/or pricing. The assignabiity or non-assignabiity of the agreement and any imiting factors. Designation of the country and state (if appicabe) of contract jurisdiction in the case of dispute. Source: From Internationa Marketing Management 5th Edition by Jain Reprinted with permission of South-Western, a division of Thomson Learning: Fax carried out satisfactoriy the company may be stuck with a weak performer that either cannot be removed or is very costy to buy out from the contract. Contract duration is important, especiay when an agreement is signed with a new distributor. In genera, distribution agreements shoud be for a specified, reativey short period (one or two years). The initia contract with a new distributor shoud stipuate a tria period of either three or six months, possiby with minimum purchase requirements. Duration is aso dependent on the oca aws and their stipuations on distributor agreements. Geographic boundaries for the distributor shoud be determined with care, especiay by smaer firms. Future expansion of the product market might be compicated if a distributor caims rights to certain territories. The marketer shoud retain the right to distribute products independenty, reserving the right to certain customers. The payment section of the contract shoud stipuate the methods of payment as we as how the distributor or agent is to draw compensation. Distributors derive compensation from various discounts, such as the functiona discount, whereas agents earn a specific commission percentage of net saes (typicay per cent). Given the voatiity of currency markets the agreement shoud aso state the currency to be used. Product and conditions of sae need to be agreed on. The products or product ines incuded shoud be stipuated, as we as the functions and responsibiities of the intermediary in terms of carrying the goods in inventory, providing service in conjunction with them, and promoting them. Conditions of sae determine which party is to be responsibe for some of the expenses (e.g. marketing expenses) invoved, which wi in turn have an effect on the price to the distributor. These conditions incude credit and shipment terms. Means of communication between the parties must be stipuated in the agreement if a marketer distributor reationship is to succeed. The marketer shoud have access to a information concerning the marketing of its products in the distributor s territory, incuding past records, present situation assessments and marketing research. Motivating Geographic and cutura distance make the process of motivating channe members difficut. Motivating is aso difficut because intermediaries are not owned by the 518

14 Chapter 16 company. Since intermediaries are independent firms they wi seek to achieve their own objectives, which wi not aways match the objective of the manufacturer. The internationa marketer may offer both monetary and psychoogica rewards. Intermediaries wi be strongy infuenced by the earnings potentia of the product. If the trade margin is poor and saes are difficut to achieve intermediaries wi ose interest in the product. They wi concentrate upon products with a more rewarding response to seing efforts, since they make their saes and profits from their own assortment of products and services from different companies. It is important to keep in reguar contact with agents and distributors. A consistent fow of a reevant types of communication wi stimuate interest and saes performance. The internationa marketer may pace one person in charge of distributor-reated communications and put into effect an exchange of personne so that both organizations gain further insight into the workings of the other. Controing Contro probems are reduced substantiay if intermediaries are seected carefuy. However, contro shoud be sought through the common deveopment of written performance objectives. These performance objectives might incude some of the foowing: saes turnover per year, market share growth rate, introduction of new products, price charged and marketing communications support. Contro shoud be exercised through periodic persona meetings. Evauation of performance has to be done against the changing environment. In some situations economic recession or fierce competition activity prevents the possibiity of objectives being met. However, if poor performance is estabished, the contract between the company and the channe member wi have to be reconsidered and perhaps terminated. Termination Typica reasons for the termination of a channe reationship are as foows: The internationa marketer has estabished a saes subsidiary in the country. The internationa marketer is unsatisfied with the performance of the intermediary. Open communication is aways needed to make the transition smooth. For exampe, the intermediary can be compensated for investments made, and major customers can be visited jointy to assure them that service wi be uninterrupted. Termination conditions are among the most important considerations in the distribution agreement. The causes of termination vary and the penaties for the internationa marketer may be substantia. It is especiay important to find out what oca aws say about termination and to check what type of experience other firms have had in the particuar country. In some countries terminating an ineffective intermediary can be time consuming and expensive. In the European Union one year s average commissions are typica for termination without justification. A notice of termination has to be given three to six months in advance. If the cause for termination is the manufacturer s estabishment of a oca saes subsidiary, then the internationa marketer may consider engaging good empoyees from the intermediary as, for exampe, managers in the new saes subsidiary. This can prevent a oss of product know-how that has been created at the intermediary s firm. The internationa marketer coud aso consider an acquisition of this firm if the intermediary is wiing to se. 519

15 Part IV Designing the goba marketing programme 16.5 Managing ogistics Logistics A term used to describe the movement of goods and services between suppiers and end users. Logistics is used as a term to describe the movement of goods and services between suppier(s) and end users. Two major phases in the movement of materias are of ogistica importance. The first phase is materias management, or the timey movement of raw materias, parts and suppies into and through the firm. The second phase is physica distribution, or the movement of the firm s finished product to its customers. The basic goa of ogistics management is the effective coordination of both phases and their various components to resut in maximum cost effectiveness whie maintaining service goas and requirements. The primary area of concern in this section is the second phase: that is, order handing, transportation, inventory and storage/warehousing. Order handing The genera procedure for order handing, shipment and payment is shown in Figure 16.9: 1 The sae: Importer makes enquiry of potentia suppier. Exporter sends cataogues and price ist. Importer requests pro-forma invoice (price quote). Exporter sends pro-forma invoice. Importer sends purchase order. Exporter receives purchase order. 2 Importer arranges financing through its bank (issuing bank). 3 Importer s bank sends etter of credit (most frequenty used form of payment) to exporters bank (advising bank). 4 Exporter s bank notifies exporter that etter of credit is received. Figure 16.9 The export procedure Source: Abaum et a., 1994, p

16 Chapter 16 5 Exporter produces or acquires goods. 6 Exporter arranges transportation and documentation (obtained by exporter or through freight forwarding company). Space reserved on ship or aircraft. Documents acquired or produced, as required: (a) exporter s icence; (b) shipper s export decaration; (c) commercia invoice; (d) bis of ading; (e) marine insurance certificate; (f) consuar invoice; (g) certificate of origin; (h) inspection certificates; (i) dock receipts. 7 Exporter ships goods to importer. 8 Exporter presents documents to one of the banks for payment. 9 Importer has goods ceared through customs and deivered to its warehouse. Source: Abaum et a., 1994, p Most common export documents This section is drawn from Abaum et a. (1994), p Transportation documents Bi of ading. This is a receipt for the cargo and a contract for transportation between a shipper and a transport carrier. It may aso be used as an instrument of ownership. Dock receipt. This is the document acknowedging receipt of the cargo by an ocean carrier. Insurance certificate. This is evidence that insurance is provided to cover oss or damage to the cargo whie in transit. Banking documents Letter of credit. This is a financia document issued by a bank at the request of the importer, guaranteeing payment to the exporter if certain terms and conditions surrounding a transaction are met. Commercia documents Commercia invoice. This is a bi for the products from the exporter to the buyer. Government documents Export decaration. This incudes compete information about the shipment. Consuar invoice. This is a document signed by a consu of the importing country that is used to contro and identify goods shipped there. Certificate of origin. This is a document certifying the origin of products being exported, so that the buying country knows in which country the products were produced. The enquiry or order for products and/or services may be unsoicited or the resut of a firm s efforts (the manufacturer or the agent). When the actua order is received the internationa marketer wi normay send a confirmation of receipt, foowed by a commitment to fufi the order if a of the terms and payment arrangements are acceptabe for the internationa marketer. 521

17 Part IV Designing the goba marketing programme A pro-forma invoice may be prepared by the exporter to indicate the terms that have been agreed upon (or are proposed). The pro-forma invoice normay shows the type and amount of merchandise, unit costs and extensions, expected weights and measures, and often other terms (incuding payment terms). If accepted by the prospective buyer it may serve as a contract. Order cyces are shortened by rapid processing of orders, and the roe of communications technoogy (such as eectronic data interchange) is critica in reducing the time factor. Few countries have efficient and reiabe communication systems; however, possessing an efficient internationa order-processing system woud give a firm a competitive advantage. Transportation This deas primariy with the mode of transport, which usuay constitutes per cent of the retai costs of imported goods. There are four main modes of transport: road, water, air and rai. Road Roads are very efficient for short haus of high-vaue goods, being very fexibe in route and time. Goods can be deivered direct to customers premises. However, restrictions at border contros can be time consuming, and ong distances and the need for sea crossings reduce the attractiveness of freight transport by road. In some parts of the word, particuary in LDCs, road surfaces are poor. Water Water transportation is a key mode for internationa freight movements because it provides a very ow-cost way to transport buky products such as coa and oi. However, water transport is sow and is subject to difficuties caused by the weather for exampe, some ports are iced over for part of the winter. Water transport usuay needs to be combined with other modes of transport to achieve door-to-door deivery. Increasingy nations have begun to recognize the importance of appropriate port structures and are deveoping such faciities in spite of the heavy investment necessary. If such investments are accompanied by concurrent changes in the overa infrastructure transportation efficiency shoud, in the ong run, more than recoup the origina investment. Air Air freight is avaiabe to and from most countries. There has been a tremendous growth in internationa air freight over recent decades. Air freight is consideraby more expensive per tonne/kiometre than the other modes of transport. It accounts for ess than 1 per cent of the tota voume of internationa transport, but represents more than 20 per cent of the vaue shipped by industriaized countries (Setmo and Picard, 1984). High-vaue items are more ikey to be shipped by air, particuary if they have a high weight-to-voume ratio. Rai Rai services provide a very good method of transporting buky goods over ong distances. The increasing use of containers provides a fexibe means to use rai and road modes, with minima oad transfer times and costs. High-speed trains are aso emerging in Europe and the United States as attractive aternatives. For exampe, in Europe trains traveing at 190 mies per hour have cut the trave time between major European cities. 522

18 Chapter 16 The decision about which transportation mode to use is affected by a number of factors, incuding the foowing: cost of different transport aternatives; distance to the ocation; nature of the product; frequency of the shipment; vaue of the shipment; avaiabiity of transport. The eve of economic deveopment is a major determinant of the avaiabiity of transportation in some markets air freight is highy deveoped compared to rai transportation. Freight forwarders Freight forwarders provide an important service to exporters. The fu-service foreign freight forwarder can reieve the producer of most of the burdens of distribution across nationa borders. This is particuary so for sma and medium-sized companies and those that are inexperienced in exporting. Freight forwarders provide a wide range of services, but the genera activities and services are as foows: coordination of transport services; preparation and processing of internationa transport documents; provision of warehousing; expert advice. The traditiona view of the freight forwarder is that of a provider of services, a company that does not own transport faciities but which buys from the most appropriate transport provider, and a company that acts as the agent of the exporter. Various changes have taken pace that have impacted upon freight forwarders. There has been a tendency for transport companies to extend their activities to incude an in-house forwarding function. In addition, arger and more experienced exporters have deveoped their own in-house transport and documentation expertise. Both these trends have threatened the freight forwarder. Inventory (at the factory base) The purpose of estabishing inventory to maintain product movement in the deivery pipeine, in order to satisfy demand is the same for domestic and internationa inventory systems. There are many different cost eements invoved in managing an inventory: storage, interest on capita tied up, taxes, ost saes, etc. Since these costs may sometimes be sizeabe management must be concerned about inventory contro. This invoves determining the proper eve of inventory to hod so that a baance is maintained between customer service and inventory cost. In deciding the eve of inventory to be maintained the internationa marketer must consider two factors: 1 Order cyce time: the tota time that passes between the pacement of an order by a customer and the receipt of the goods. Depending on the choice of transportation mode, deivery times may vary consideraby. As a resut the marketer has to keep arger safety stock in order to be abe to satisfy demand in any circumstance. However, the marketer coud attempt to reduce order cyce time, thereby reducing 523

19 Part IV Designing the goba marketing programme costs, by atering transportation method, changing inventory ocations or shifting order pacement to direct computer-order entry (EDI). 2 Customer service eves: the abiity to fufi customer orders within a certain time. For exampe, if within three days 80 per cent of the orders can be fufied, the customer service eve is 80 per cent. The choice of customer service eve for the firm has a major impact on the inventories needed. Because high customer service eves are costy (inventory constitutes tied-up capita) the goa shoud not be the highest eve possibe but rather an acceptabe eve, based on customer expectations. For some products customers may not demand or expect quick deivery. In addition, if higher customer service eves resut in higher prices, this may reduce the competitiveness of a firm s product. Besides these two factors, internationa inventories can aso be used as a strategic too in deaing with currency vauation changes or hedging against infation. Storage/warehousing (in foreign markets) Sometimes goods and materias need to be stored in the export markets. However, this activity invoves more than just storage. In addition to storing products in anticipation of consumer demand warehousing encompasses a broad range of other activities, such as assembing, breaking buk shipments into smaer sizes to meet customer needs, and preparing products for reshipment. Warehousing decisions focus on three main issues: 1 where the firm s customers are geographicay ocated; 2 the pattern of existing and future demands; 3 the customer service eve required (i.e. how quicky a customer s order shoud be fufied). The foowing genera observations can be made about warehousing faciities: If products need to be deivered quicky storage faciities wi be required near the customer. For high-vaue products (e.g. computer software) the ocation of the warehouse wi be of minima importance as these ightweight products can be air freighted. Exhibit 16.2 How Bosch-Siemens improved customer service and reduced costs by cosing warehouses Bosch-Siemens (BS) is a eading European manufacturer of consumer white goods, with handsome market shares in Germany, Scandinavia, Spain and Greece. Recenty the company decided to reduce the number of its European warehouses from 36 to 10. BS aimed to cut costs and reduce the amount of stock it hed. The company aso wanted to improve its distribution, enhance customer service and reform its ogistics structure to boost its share in other markets, particuary the United Kingdom and France. The process of continent-wide rationaization took three years to pan. BS fixed on ten sites as its current optimum, based on effective deivery criteria. It wanted to be abe to reach customers within hours. On the other hand, the optimum size of a warehouse in terms of cost is 20,000 30,000 m 2 Hence BS arrived at ten as its optimum number of warehouses in Europe. These are shown in Figure BS seeks to serve severa territories from each warehouse. Thus, for exampe, it has a warehouse in Sweden that aso covers Norway and Finand; and its south German warehouse suppies Luxembourg, Austria and parts of France. 524

20 Chapter 16 Figure Bosch-Siemens European distribution centres Source: Abaum et a., 1994, p By cutting warehouses it has reduced tota distribution and warehousing costs, brought down staff numbers, hods fewer items of stock, provides greater access to regiona markets, makes better use of transport networks and has improved service to customers. The financia benefit is a saving of DM30 miion a year, or a reduction of 21 per cent in tota ogistics costs. BS has aso achieved greater fexibiity in the use of transport systems such as rai and waterways. It has brought stock numbers down from 1 miion items to 700,000. Source: EIU (1995). Packaging A good baance needs to be achieved between the high costs of the substantia export packing required to eiminate a damage and the price and profit impications that this has for the customer and the exporter. Export packing has been modified over the years from wooden crates. Different countries have different reguations about what materias are acceptabe. One exampe of this is the recycing of containers for reuse, which requires a system for deposits and returns into the distribution channes. In addition, export packing infuences customer satisfaction through its appearance and its appropriateness to minimise handing costs for the customer. During recent years packaging has been simpified by paetization. Computer software is now avaiabe from packaging suppiers that can design individua product packaging to maximize the number of units per paet, and thus per container oad. Paetization with shrink-wrap protection, together with containerization, has served both to protect goods against damage and to diminish osses through theft. Third-party ogistics (contract ogistics) A growing preference among internationa firms is to empoy outside ogistica expertise. The main thrust behind the idea is that individua firms are experts in their industry 525

21 Part IV Designing the goba marketing programme and shoud therefore concentrate ony on their operations. Third-party ogistics providers, on the other hand, are experts soey at ogistics, with the knowedge and means to perform efficient and innovative services for those companies in need. The goa is improved service at equa or ower cost. One of the greatest benefits of contracting out the ogistics function in a foreign market is the abiity to take advantage of an in-pace network compete with resources and experience. The oca expertise and image are crucia when a business is just starting up. One of the main arguments eveed against contract ogistics is the oss of the firm s contro in the suppy chain. Yet contract ogistics does not and shoud not require the handing over of contro. Rather, it offers concentration on one s core competence, a division of abour. The contro and responsibiity towards the customer remain with the firm, even though operations may move to a highy trained outside organization Impications of the Internet for distribution decisions The Internet has the power to change drasticay the baance of power among consumers, retaiers, distributors, manufacturers and service providers. Some participants in the distribution chain may experience an increase in their power and profitabiity. Others wi experience the reverse; some may even find that they have been bypassed and have ost their market share. Physica distributors and deaers of goods and services that are more convenienty ordered and/or deivered onine are indeed subject to increasing pressure from e-commerce. This disintermediation process, with increasing direct saes through the Internet, eads manufacturers to compete with their reseers, which resuts in channe confict. The extent to which these effects are saient depends upon which of the foowing four Internet distribution strategies are adopted by the manufacturer. 1 Present ony product information on the Internet As ess than 10 per cent of retai saes (in both Europe and the United States) presenty occur over the Internet, ony a few manufacturers woud be wiing to endanger their reationships with their distributors for that voume. The risk of conficts with the existing distributors woud be too great. So manufacturers may decide not to se their products through the Internet and aso prohibit their reseers from using the Internet for saes. Ony product information is provided on the Internet, with any customer queries being passed on to the appropriate channe member. In industries such as aircraft manufacturing, where saes are arge, compex and customised, this may be an appropriate strategy. 2 Leave Internet business to reseers Some companies prefer distributors to eave the Internet business for resaes and not to se directy through the Internet. How effective this strategy is depends on the existing distribution structure. It can be effective when manufacturers assign excusive territories to reseers, since reseers can be restricted to either deivering ony to customers within their assigned territory or they can be compensated through profit pass-over agreements if they are adversey affected. Any eads generated by the manufacturer s website are passed on to the appropriate regiona reseer. 526

22 Chapter 16 By contrast, for intensivey distributed products where reseers have no assigned territories, reseers simpy compete with each other as they woud do in the norma, physica marketpace. The goba nature of the Internet creates price transparency, which may confict with differentia prices charged by the manufacturer in various markets. Another imitation of this approach is that most consumers search for manufacturers websites rather than reseers websites. Inabiity to purchase from the manufacturer s website can be frustrating for the consumer and can resut in ost saes for the manufacturer. 3 Leave Internet business to the manufacturer ony A third strategy for the manufacturer is to restrict Internet saes excusivey to itsef. This strategy is ony profitabe if the manufacturer has a business mode that is aigned with saes through the Internet. The business system of most manufacturers (such as consumer packaged goods companies) is not set up for saes to end users who pace numerous sma orders. Aternativey, by seing through the Internet a manufacturer may aim not to generate profits, but rather to earn about this new channe of distribution, coect information on consumers or buid its brand. But regardess of a manufacturer s objectives reseers disike having to yied the market space to manufacturers. If the manufacturer uses this strategy it aso risks channe conficts, i.e. creating competition with its own customers (distributors). The PC manufacturer Compaq reaised this when it strugged to expoit the Internet, because to do so propery woud mean bypassing its distributors. For Compaq it was difficut to remit saes through the Internet without upsetting their distributors and jeopardizing their historicay strong reationships with them. In order to imit the direct competition with its customers Compaq introduced a differentiated product ine of PCs, Prosignia, for saes through the Internet (Kumar, 1999). 4 Open Internet business to everybody The fourth strategy is to et the market decide the winners and open the Internet to everybody for direct saes and reseers. Manufacturers who have ventured onine, either through the third or the fourth strategy, usuay se at retai prices and/or provide ony a imited ine because of their desire not to compete with their resaes. However, this imits the attractiveness of the Internet s vaue proposition. Concusion The fear of cannibaizing existing distribution channes and potentia channe confict requires manufacturers to trade off existing saes through the traditiona distribution network and potentia future saes through the Internet. Unfortunatey, history suggests that most companies tend to stay with decining distribution networks for too ong Specia issue 1: Internationa retaiing In the continuing integration of the word economy, internationaization not ony concerns advertising, banking and manufacturing industries, it aso affects the retaiing 527

23 Part IV Designing the goba marketing programme business. The trend in a industriaized countries is towards arger units and more sefservice. The number of retai outets is dwinding, but the average size is increasing. However, retaiing sti shows great differences between countries, refecting their different histories, geography, cuture and economic deveopment. The cutura importance attached to food in Itay provides an opportunity for sma speciaist food retaiers to survive and prosper. In other deveoped countries, such as the United States, the trend is towards very arge superstores that incorporate a wide range of speciaity foods. The Itaian approach reies on sma-scae production by the retai proprietor. The US approach encourages mass production, branding and sophisticated distribution systems to hande inventory and freshness issues. A consequence of the greater economies of scae and efficiency in US retaiing is that the United States tends to have arger retai outets and a smaer number per capita than other deveoped countries. Some industriaized countries do not have an extensive modern retai sector. Among them are Japan, France and Itay. Japan has more retai outets than the United States with ony haf the popuation (Jain, 1996, p. 536). Legisation A major reason for the ack of growth of arge-scae retaiing in these countries is egisation. Compared to the United States, retaiing in Europe and to some extent Japan is subject to rather stringent egisation. In order to protect the independent retaier in town centres egisation primariy targets competition, new shops, and days and hours of opening. Legisative conditions differ across Europe. In the United Kingdom egisation is ibera, which expains the rapid deveopment of arge supermarkets in the 1980s and arge speciaized stores in the 1990s. In Itay, where egisation is much stricter, the opening of department stores and hypermarkets has been imited. Legisation can hamper the deveopment of some forms of retaiing. Though France was one of the creators of the hypermarket (a giant market), the country passed a aw reguating the estabishment or expansion of retai stores in The effect of this aw and simiar aws in Itay is to aow existing retaiers to protest against the estabishment of any new, arge-scae retaiers in their area. Internationaization of retaiing Both US and European retaiers are internationaizing their business. Among arge internationa US retaiers are: 7-eeven, McDonad s, Pizza Hut, Bockbuster Video and Toys R Us. Among the arge internationa European retaiers are IKEA, Benetton, The Body Shop and Carrefour. The Japanese are reative newcomers to this internationaization of retaiing, but they are getting deepy invoved. One of the Japanese food retaiers, Jusco, has supermarkets in Hong Kong, Thaiand and Maaysia. South-east Asia seems to be the natura zone of infuence for Japanese retaiers, and they have spread throughout the region. Despite the trend towards internationaization in retaiing a prospective internationa retaier aso faces some serious chaenges and probems. The probems begin with the consumers. Retaiers performance in oca markets is highy sensitive to variations in consumer behaviour. These are differences in consumer tastes, buying habits and spending patterns from country to country. Such differences have impications for a more differentiated merchandise offering aong dimensions such as coour, fabric and site for cothing, and favour for confectionery and snack foods. Other probems that retaiers wi encounter when operating internationay incude shortages of key resources such as and and abour, unfavourabe tax and tariff 528

24 Chapter 16 structures, restrictions on trading hours and foreign ownership, and impenetrabe estabished suppier reationships. A case study of one US speciaity retaier (Barth et a., 1996) has pinpointed the probems of estabishing a retai business in Europe. The reasons for the reativey bad financia performance in European retaiing can be sought in the foowing factors: higher costs of acquiring rea estate in Europe; more expensive abour in Europe; the compex egisation for estabishing arge retai stores in Europe. Stages of internationaization The stages concept (the Uppsaa schoo: see section 3.2) has been appied to depict the typica movement by retaiers towards internationaization. Given the considerabe risks and costs invoved in expansion outside home markets, most have viewed the prospect with a degree of reuctance. Retai companies wi typicay move from reuctance to cautious expansion abroad, starting with the cosest markets. The internationaization of retaiing has produced different styes of internationa operation, ranging from mutinationa to goba (Figure 16.11). Goba retaiers such as Toys R Us vary their format very itte across nationa boundaries, achieving the greatest economies of scae but showing the east oca responsiveness. Mutinationa retaiers, on the other hand, operate as autonomous entities within each country. A midde course is termed transnationa retaiing, whereby the company seeks to achieve goba efficiency whie responding to nationa opportunities and constraints. Trade marketing For too ong manufacturers have viewed vertica marketing channes as cosed systems, operating as separate, static entities. The most important factors creating ong-term, integrated strategic pans and fostering productive channe reationships were argey ignored. Fortunatey a new phiosophy about channe management has emerged, but to understand its potentia we must first understand how power has deveoped at the retaier eve. Figure Internationa deveopment positions Source: McGodrick and Davies, 1995, p

25 Part IV Designing the goba marketing programme Channe power Abiity of a channe member to contro marketing variabes of any other member in a channe at a different eve of distribution. Internationa retaiing Wordwide tendency towards concentration in retaiing, creating huge buying power in the big internationa retai chains. Power in channe reationships can be defined as the abiity of a channe member to contro marketing decision variabes of any other member in a channe at a different eve of distribution. A cassic exampe of this channe power is the amount of power wieded by retaiers against the food and grocery manufacturers. As the baance of power has shifted, more merchandise is controed by fewer and fewer retaiers. There is a wordwide tendency towards concentration in retaiing resuting in internationa retaiing. The concentration in the European food sector is most evident in the northern part of Europe. Since the mid 90s (when Tabe 16.3 was created) new payers have arrived on the European grocery market, for exampe, the German discount-chain, Lid, which is now second in the German discount-sector after Adi. Lid is aso expanding to the remaining European area (e.g. to Scandinavia, UK and France). In the United Kingdom Tesco is now No. 1 and Sainsbury No. 2. A consequence of this deveopment is that there has been a wordwide shift from manufacturer to retaier dominance. Power has become concentrated in the hands of fewer and fewer retaiers, and the manufacturers have been eft with itte choice but to accede to their demands. This often resuts in manufacturing of the retaiers own brands (private abes). This phenomenon was discussed in section Therefore we can see that traditiona channe management, with its characteristics of power strugges, confict and oose reationships, is no onger beneficia. New ideas are emerging to hep channe reationships become more cooperative. This is what is known as trade marketing. Trade marketing is when the manufacturer (suppier) markets directy to the trade (retaiers) to create a better fit between product and outet. The objective is to create joint marketing and strategic pans for mutua profitabiity. For the manufacturer (suppier), it means creating twin marketing strategies: one to the consumer and another to the trade (retaiers). However, as Figure shows, potentia channe conficts exist because of differences in the objectives of the channe members. Despite potentia channe conficts what both parties share, but often forget, is their common goa of consumer satisfaction. If the desired end resut is to create joint marketing pans a prerequisite must be an improved understanding of the other s perspective and objectives. Retaiers are ooking for potentia saes, profitabiity, excusivity in promotions and voume. They are currenty in the enviabe position of being abe to choose brands that fufi those aims. A private abe manufacturer has to create different packages for different retaiers. By carefuy designing individua packages the manufacturer gains a better chance of striking up a reationship with the best-matched retaier. Manufacturers can offer retaiers a tota support package by stressing their own strengths. These incude marketing knowedge and experience, market position, proven new product success, media support and exposure, and a high return on investment in shef space. If a joint strategy is going to be successfu manufacturers and retaiers must work together at every eve, perhaps by matching counterparts in each organization. As a consequence of the increasing importance of the individua customer the concept of the key account (key customer) was introduced. Key accounts are often arge retai chains with a arge turnover (in tota as we as of the suppier s products), which are abe to decide quantity and price on behaf of different outets. Segmentation of customers is therefore no onger based ony on size and geographic position but aso on customers (retaiers ) structure of decision making. This resuts in a gradua restructuring of saes from a geographic division to a customer division. This reorganization is made visibe by creating key account managers (managers responsibe for customers). 530

26 Chapter 16 Figure Channe reationships and the concept of trade marketing Cross-border aiances in retaiing The focus of this section is aiances between retaiers that are both horizonta (i.e. retaier to retaier) and aso internationa, in that they cross the boundaries of nation states. Cross-border retaier aiances are emerging predominanty between western European retaiers and can, in many cases, be interpreted as expicit responses to the perceived threats and opportunities of the EU interna market. None of the cross-border aiances in Europe can be described as equity participating aiances, which incude a cross-sharehoding between members. None of the aiances invoves the sharing of equity, but they a have a centra secretariat with the function of coordinating operationa activities buying, branding, expertise exchange and product marketing. Unti now the range of activities performed by the secretariats of the aiances has been imited and excudes actua processing and centra payments. The present advantage for an individua retai member in a cross-border aiance ies primariy in centra purchasing from suppiers, where price advantages fow to a members, suggesting that the aiance is attempting to countervai the power of the manufacturer (suppier). Cross-border centra buying can be a reevant starting point for both manufacturers and retaiers attempting to move towards a pan-european suppy network. 531

27 Part IV Designing the goba marketing programme 16.8 Specia issue 2: Grey marketing (parae importing) Grey marketing (parae importing) Importing and seing of products through market distribution channes that are not authorized by the manufacturer. It occurs when the manufacturer use significanty different market prices for the same product in different countries and mainy exits for high-priced, high-end products, ike fashion and uxury appare. Grey marketing or parae importing can be defined as the importing and seing of products through market distribution channes that are not authorized by the manufacturer. It occurs when manufacturers use significanty different market prices for the same product in different countries. This aows an unauthorized deaer (in Figure 16.13, a whoesaer) to buy branded goods intended for one market at a ow price and then se them in another, higher-priced market, at a higher profit than coud have been achieved in the ow-price market. Grey markets mainy exist for high-priced, high-end products, ike fashion- and uxury fashion appare, watches, perfume etc. Grey marketing often occurs because of the fuctuating vaue of currencies between different countries, which makes it attractive for the grey marketer to buy products in markets with weak currencies and se them in markets with strong currencies. Grey markets can aso be the resut of a distributor in one country having an unexpected oversuppy of a product. This distributor may be wiing to se its excess suppy for ess than the norma margin to recover its investment. Other reasons for ower prices in some countries (which can resut in grey marketing) might be ower transport costs, fiercer competition and higher product taxes (high product taxes put pressure on the ex-works price to keep the end-consumer price at an acceptabe eve). The particuar probem with grey marketing for the manufacturer is that it resuts in authorized intermediaries osing motivation. The grey marketer usuay competes ony on price and pays itte attention to providing marketing support and after-saes service. Grey markets are fed by many sources in the e-business. Perhaps the most common are authorized deaers who can make a profit, or at east minimize a oss, by seing to unauthorized deaers. The internet makes it easier for firms operating in grey territory Figure Grey marketing (parae importing) Source: Paiwoda, 1993, p Reprinted with permission from Butterworth-Heinemann Pubishers, a division of Reed Educationa & Professiona Pubishing Ltd. 532

28 Chapter 16 to reach a wide range of customers. Companies can buy in buk and rese to unauthorized distributors, a situation that has characterized the market for computer parts for some time. Sometimes a manufacturer itsef wi se into the grey market as saespeope strugge to meet quotas or managers attempt to cover costs or make year-end saes goas (Antia et a. 2004). Possibe strategies to reduce grey marketing Sometimes companies hope that it is a short-term probem and that it wi disappear. Indeed it might be if the price difference is the resut of the fuctuating vaue of currencies. At other times a more proactive approach to the probem is needed: Seek ega redress. Athough the ega option can be time consuming and expensive, some companies (e.g. Seiko) have chosen to prosecute grey marketers. Change the marketing mix. This invoves three eements: (a) Product strategy. This strategy is about moving away from the standardization concept (same product for a markets), and introducing a differentiated concept with a different product for each main market. (b) Pricing strategy. The manufacturer can change the ex-works prices to the channe members to minimize price differentias between markets. The manufacturer can aso narrow the discount schedues it offers for arge orders. This wi reduce the incentive for intermediaries to over-order to get ower prices and ater se unsod stock on the grey market, sti at a profit. (c) Warranty strategy. The manufacturer may reduce or cance the warranty period for grey market products. This wi require that the products can be identified through the channe system Summary In this chapter we have examined the management of internationa distribution channes and ogistics. The main structure of this chapter was given in Figure 16.1, and from the discussion it is evident that the internationa marketer has a broad range of aternatives for seecting and deveoping an economica, efficient and high-voume internationa distribution channe. In many instances the channe structure is affected by externa factors and it may vary from nation to nation. Physica distribution (externa ogistics) concerns the fow of goods from the manufacturer to the customer. This is one area where cost savings through efficiency are feasibe, provided the decision is systematicay made. The changing nature of internationa retaiing infuences distribution panning. During the ast decade the baance of power (between manufacturers and retaiers) has shifted in favour of the retaiers. The manufacturer often has no other choice than to cooperate with arge and increasingy concentrated retaiers in terms of the trade marketing concept. A phenomenon of growing importance in internationa markets is the grey market, which consists of unauthorized traders buying and seing a company s product in different countries. Companies confronted with a grey market situation can react in many ways. They may decide to ignore the probem, take ega action or modify eements of their marketing mix. The option chosen is strongy infuenced by the nature of the situation and its expected duration. 533

29 Part IV Designing the goba marketing programme CASE STUDY 16.1 De Beers: Forward integration into the diamond industry vaue chain Since the ate 1800s the South African mutinationa De Beers ( has reguated both the industria and gemstone diamond markets and effectivey maintained an iusion of diamond scarcity. It has deveoped and nurtured the beief that diamonds are precious, invauabe symbos of romance. Every attitude consumers hod today about diamonds exists at east in part because of the persistent efforts of De Beers. Moreover, by monitoring the suppy and distribution of diamonds throughout the word, De Beers has introduced and maintained an unprecedented degree of price stabiity for a surprisingy common minera: compressed carbon. Such unique price stabiity ies within the carte s tight contro over the distribution of diamonds. De Beers operating strategy has been pure and simpe: to restrict the number of diamonds reeased into the market in any given year and to perpetuate the myth that they are scarce and shoud therefore command high prices. De Beers spends about $200 miion a year to promote diamonds and diamond jeweery. A diamond is forever and the firm contros neary 70 per cent of the rough diamond market. De Beers contros a producer s carte that operates as a quantity-fixing entity by setting production quotas for each member (as does OPEC). De Beers has successfuy convinced the producers that the diamond suppy must be reguated in order to maintain favouraby high prices and profits. During the eary part of the ast century much of the diamond carte s strength rested with De Beers contro of the South African mines. Today the source of power no onger comes from rough diamond production aone, but from a sophisticated network of production, marketing saes and promotion arrangements, a administered by De Beers. It is interesting to note that diamond prices have itte or no reation to the cost of extraction (production). Tabe 1 shows average or norma price mark-ups on gemstones aong the channe of distribution. Tabe 1 Mark-ups on diamonds Stage of distribution Mark-up (%) Average vaue of 0.5 carat gem ($/carat) Cost of mining 100 Mine saes Deaers of rough gems Cutting units Whoesaer deaers Retai Source: adapted from Ariovich, 1985 and Bergenstock and Maskua, A diamond that may cost $100 to mine can end up costing a consumer $920 at a oca jeweery store. Business cyces and individua commercia practices may positivey or negativey infuence these figures, together with the gemstone quaity. Diamond saes, known in the trade as sights, are hed ten times a year in London, in Lucerne, Switzerand, and in Kimberey, South Africa. The saes are imited to approximatey 160 privieged sighthoders, primariy owners of diamond-cutting factories in New York, Te Aviv, Mumbai and Antwerp, who then se to the rest of the diamond trade. 534

30 Chapter 16 Figure De Beers diamond distribution Sources: adapted from De Beers Annua Report and Bergenstock and Maskua, Diamond output from De Beers sef-owned and sef-operated mines constitutes ony 43 per cent of the tota word vaue of rough diamonds. Because it is not the soe producer of rough stones in the word De Beers has had to join forces with other major diamond-producing organizations, forming the internationa diamond carte that contros neary three-quarters of the word market. De Beers has constructed a controed suppy and distribution chain whereby a carte producers are contracted to se the majority of their entire output to a singe marketing entity: the De Beers-controed Centra Seing Organization (CSO) (see Figure 16.14). The tota rough diamond suppy controed by the CSO comes from three sources: De Beers/ Centenary-owned mines, outside suppiers contracted to the CSO (carte members) and open market purchases via buying offices in Africa, Antwerp and Te Aviv (rough output purchased from countries that have not signed an agreement with De Beers). De Beers functions as the soe diamond distributor. In any given year approximatey 75 per cent of the word s diamonds pass through the CSO to cutters and brokers. The economic success of the carte depends highy on strict adherence to their rues, written or unwritten. Cients who foow the rues are rewarded with consistent upgrades in the quaity and quantity of rough stones in their boxes, whie those who circumvent them find progressivey worse aocations and risk not being invited back to future sights. De Beers forward integration decision Unti 2001 De Beers concentrated on suppying its diamonds to brand manufacturers, such as Cartier. The core business of the De Beers Group remains the mining and marketing of rough diamonds. However, in January 2001 the De Beers Group, the word s premier diamond group, and LVMH Moet Hennessy Louis Vuitton, the word s eading uxury products group, agreed to estabish an independenty managed joint venture, De Beers LV, to deveop the goba consumer brand potentia of the De Beers name. LVMH Moet Hennessy Louis Vuitton is the home of premier brands in the categories of fashion and eather goods, watches and jeweery, wine and spirits, cosmetics and perfumes. LVMH wi contribute with its extensive experience in both deveoping uxury brands and roing out premium retai concepts. The mother company, De Beers SA, contributes to the joint venture with its over 100 years of experience in the form of technoogy and individua experts to aow for the seection of the most beautifu diamonds. Ë 535

31 Part IV Designing the goba marketing programme As part of the joint venture agreement De Beers SA has transferred to De Beers LV the wordwide rights to use the De Beers brand name for uxury goods in consumer markets. From now on, De Beers wi design, manufacture and se premium diamond jeweery under its own brand name. The diamonds bearing De Beers brand name wi be sod excusivey through De Beers stores. De Beers has opened a fagship store in London (Oxford Street) and have pans for further openings in New York and Paris. Source: information and news on Questions 1 What coud be De Beers motives for making this forward integration into the retai and consumer market? 2 Is it a wise decision? 3 How shoud De Beers deveop its Internet strategy foowing this forward integration strategy? 4 Woud it be possibe for De Beers, with its branded diamonds, to standardize the internationa marketing strategy across borders. CASE STUDY 16.2 Nokia: What is wrong in the US market for mobie phones can Nokia recapture No. 1 position from Motoroa? Finnish Nokia is a word eader in mobie communications. Nokia connects peope to each other and the information that matters to them with easy-to-use products ike mobie phones, devices and soutions for imaging, games, media and businesses. Nokia provides equipment, soutions and services for network operators and corporations. History Nokia s roots go back to the foundation of the Nokia wood-pup mi in It took its current form as a corporation under the aws of the Repubic of Finand in 1967, upon the merger of three separate Finnish companies invoved in a range of industries. In the 1980s, Nokia strengthened its position in the teecommunications, consumer eectronics and persona computer markets. In 1982, it introduced the first fuy digita oca teephone exchange in Europe and the word s first car phone for the Nordic Mobie Teephone anaogue standard. In the eary 1990s, Nokia decided to make teecommunications its core business. As a resut, it divested a number of other businesses, incuding paper, rubber, footwear, chemicas, cabes, auminium and teevision. Nokia today Nokia s principa activity is to provide mobie phones, broadband, IP network infrastructure and reated services. It aso deveops mobie Internet appications and soutions for operators and internet service providers. Nokia is organized into four business groups: Mobie Phones, Network, Mutimedia and Enterprise Soutions. As Mobie Phones account for the argest percentage of the tota saes (61 per cent), this case wi concentrate on that business group. For the fisca year ended December 2005 the Nokia Corporation generated tota revenues of a34,191 miion ($40,489 miion). Profit before tax was a4,971 miion ($5,887 miion) for the year. At 31 December 2005, Nokia empoyed 58,874 peope and operated fourteen manufacturing faciities in eight countries around the word for the production of mobie devices and network infrastructure. 536