EMERGING MARKETS

Seven Rules of International

Distribution
by David Arnold
FROM THE NOVEMBERDECEMBER 2000 ISSUE

n established corporation looking for new international markets makes a foray into an
emerging market, carefully limiting its exposure by appointing an independent local
distributor. At rst, sales take o, revenues grow pleasingly, and the entry is praised as a

smart move. But after a while, stagnation sets in and sales plateau. Alarmed, the multinationals
managers try to discover what happened. They soon settle on what they perceive to be the main
obstacle to sustained growth: the local distributor that got the company o to a ying start has run out
of ideas and is now underperforming.

This pattern is repeated again and again as multinationals expand into new markets in developing
countries. Over time, a corporations executives decide that the distribution organization isnt run as
they would like. They rush in and make major changes, in some cases buying the local distributor or,
more often, reacquiring the distribution rights and starting their own subsidiary. In either case, its
messy. A transition from indirect to direct sales is usually costly and disruptive. It can also create new
problems that come to the surface only in the long term: executives may discover a few years later
that theyve gone too far in correcting a number of situations like this, saddling the multinational with
a dense and inecient network of national distributors.

The frustrations are summed up by the CEO of a major U.S. specialty chemical company: In the end,
we always do a better job with our own subsidiaries: sales improve, and we have greater control over
the business. But we still need local distributors for entry, and we are still searching for strategies to
get us through the transitions without battles over control and performance.

I examined this pattern of imbalance and correction in a two-year eld study of eight corporations in
the consumer, industrial, and service sectors. These companies had entered almost 250 new countrymarkets, and I looked at their international distribution strategies in these markets. The research
showed that avoiding the pattern of underperformance and correction meant accepting that, in most
cases, the problem wasnt as simple as the distributors being poorly run. I learned that a corporation
could avoid this scenario by overseeing marketing strategy from the start. Below, Ill look at what goes
wrong with most distribution arrangements in developing countries and then present seven
guidelines to head o potential problems. In the long run, multinationals come to see that it makes
sense to continue working with independent local distributors who handle sales and a distribution
system, even after the international companies have taken control of marketing strategy and major
global accounts.

What Goes Wrong and Why

Most multinationals stumble onto a stepwise strategy for penetrating markets in emerging countries
through a series of unplanned actions to reinvigorate sales. As the pattern recurs with entries into
subsequent markets, this approach, dubbed the beachhead strategy, becomes ocial policy in many
organizations.

On the surface, the strategy makes a certain amount of sense. Multinationals start from scratch in
sales and distribution when they enter new markets. Since markets are nationally regulated and
dominated by networks of local intermediaries, corporations need to partner with local distributors to
benet from their unique expertise and knowledge of their own markets. The multinationals know
that on their own, they cannot master local business practices, meet regulatory requirements, hire
and manage local personnel, or gain introductions to potential customers.

At the same time, the multinationals want to minimize risk. They do this by hiring local distributors
and investing very little in the undertaking. Thus, the companies cede control of strategic marketing
decisions to the local partners, much more control than they would cede in home markets.

Nevertheless, as the CEO of the chemical company points out, up to now many multinationals have
eventually wanted to control their own operations through directly owned subsidiaries; theyre
seeking the economies of scale and control obtainable across a global network of marketing
operations. For many multinationals, its a foregone conclusion that local distributors have merely
been vehicles for market entry, temporary partners incapable of sustaining growth in the long term.
(For a discussion of distributors long-term prospects, see the sidebar Is There a Future for Local
Distributors?)

However, most managers dont admit this. Instead,

Is There a Future for Local

Distributors?

they nd fault with the ways local distributors run

For distributors in emerging markets

seeking to sell multinationals products,
my research ndings are alarming. In the
eyes of many corporations, the
independent distributor is an endangered
species. Virtually all executives of
multinationals I interviewed bemoaned the
lack of strategic marketing by distributor
organizations, and many predicted that the
gradual globalization of competition would
lead to the disappearance of many such
distributors.

multinationals what typically goes wrong, youll

The track record of distributors in new

markets seems to support this bleak view:
in the great majority of cases,
multinationals bought or red their
distributors at some point during the
partnerships or created their own directsales subsidiaries. In only 5% of the 250
cases I studied, multinationals switched to
new distributors.
A few distributors have managed to
continue as representatives of
multinationals over the long run (in some
cases, for more than ten years). Most, its
true, were located in countries not
considered strategic by the multinationals
a characteristic over which the
distributors had no control. But the
surviving distributors shared two other
characteristics.
They carried product lines that
complemented, rather than competed
with, the multinationals products.

their businesses. If you ask managers of

hear one of three thingsand sometimes youll
hear all of them.

The distributor didnt know how to grow the

market. In many cases, distributors achieve initial
sales growth by picking the low-hanging fruit
making easy sales of the multinationals proven,
core products to the distributors existing
customers. When the business challenge shifts to
introducing additional products or penetrating
market segments in which the distributors arent
established, corporations say distributors dont
have the necessary skills.

The distributors didnt invest in business growth.

At the start, corporations often grant distributors
national exclusivity in order to encourage
investment. In addition, corporations and local
distributors sometimes negotiate contracts
stipulating minimum levels of marketing
investment by the distributors. Nevertheless,
multinational managers still dont think
distributors invest enough.

The distributor just wasnt ambitious enough. In

some cases, managers of multinationals attribute
the sales plateau to a lack of drive by distribution

They acted as if they were business

partners with the multinationals. They
shared market information with the
corporations; they initiated projects with
distributors in neighboring countries;
and they suggested initiatives in their
own or nearby markets. These managers

organizations, which in emerging markets tend to

be privately owned. To paraphrase many
managers, The typical distributor is looking not
for market domination but for a stable, midsize
business that will make it wealthy but is not too
big for it to control personally.

risked investing in areas such as training,

information systems, and advertising
and promotion in order to grow the
multinationals businesses.

Predictably, the local partners often have their

own ideas about why the relationships dont
succeed over the long haul: They didnt give us
enough support for growing the business. They

Multinationals clearly prefer to control

their international marketing operations,
so such characteristics cant guarantee a
long-term role for even the most effective
national distributor. But, at the very least,
a distributor whose leaders participate
actively in strategic marketing will be
valuable to the multinational and will be
able to command a high price if the
corporation seeks to buy back its sales and
distribution business.

expected the impossible. Their company politics

More generally speaking, though, the future

of independent distributors will be
inuenced by the growing regionalization of
marketing management. Many companies
are developing international marketing
organizations structured around product
groups or market sectors, and regional
management of marketing strategy ows
naturally out of that reorganization. This
happens for two reasons. First, networks of
directly owned national distributors are
inefcient; they duplicate managerial
resources at the country level and lead to
missed opportunities in areas such as
information systems and promotional
expenditures. Second, regionalization gives
multinationals greater strategic control.

for corporations to minimize risk when entering

For now, the effect that regionalization of

marketing control has on national
distributors is unclear. But it seems
probable that some national distributors
will become part of a mixed distribution
system, in which the multinational
corporation will manage major customers
directly, while other, independent,
distributors will focus on discrete segments
of national markets or smaller accounts.
The emergence of global accounts, served
directly by multinationals, highlights an
economic truth of which many
multinationals lose sight in their battles for

were too complicated. And so on.

The mutual nger-pointing overlooks a point that

seems obvious as the same themes repeatedly
emerge: neither partythe multinational nor the
distributorinvests suciently in strategic
marketing or in aggressive business development
in these less-developed markets. It may be smart
the markets, but a subsequent lack of investment
and managerial attention can seriously hamper
performance.

Neither the
multinational nor the
distributor invests
sufciently in strategic
marketing or in
aggressive business
development in these
less-developed
markets.
Multinationals dont set out to neglect these
markets, of course. Whats needed always changes
during and after market entry, but companies
dont adjust their commitments accordingly. As a
business grows in an international market,
marketing strategy evolves, and each sequential
phase requires management resources specic to

control: independent local distributors

often provide the best means of serving
local small and medium accounts.

the task, dierent skills, and nancial investment.

Requirements at the outset are very dierent from
those three to ve years later. The multinationals
product line and the distributors business
probably t best at the point of market entry. As

time passes, the t deteriorates. The distributor may be less able to deliver growth as the business
moves away from its core customer base.

Nevertheless, I think there are ways in which local distributors can continue to contribute after
market entry; the economic reasons for the existence of distributors do not disappear after
subsidiaries are established. The key to solving the problems of international distribution in
developing countries is to recognize that the phases are predictable and that multinationals can plan
for them from the start in a way that is less disruptive and costly than the doomed beachhead strategy.
(See the exhibit Managing the MultinationalDistributor Partnership.)

The key to solving the problems of international

distribution in developing countries is to
recognize that the phases are predictable and
that multinationals can plan for them.

Managing The MultinationalDistributor Partnership We follow two hypothetical multinational

corporations (MNCs) as they enter new markets in developing countries. The markets and countries
are comparable, but MNC1 follows a beachhead strategy, reacting to problems as they come up. This
strategy culminates in a serious disruption of business. In contrast, MNC2 retains control of marketing
strategy from the outset and anticipates changes.

Managing the Life Cycle of the International Distributor

The multinationals I studied made trade-os among three worthy objectives: wanting to control their
business expansion at a strategic level; partnering with local distributors, at least for the rst years, to
benet from the locals expertise; and minimizing costs and risks in these new ventures.

These are all good objectives, but nding the correct balance among them at any particular time is
tricky. In the beginning of market entry, partnerships with local distributors make good sense:
distributors know the distinctive characteristics of their markets, and most customers prefer to do
business with local partners. Changes during later phases of market entry, including a possible switch
to directly controlled distribution, are usually corrective moves to redress imbalances that emerged
during the initial phases, and many of these changes lead to new imbalances. The following guidelines
can help executives of multinationals anticipate and correct potential problems.

1. Select distributors. Dont let them select you. A foray into a new international market should be the
result of a strategic decision based on an objective market assessment. But thats not how it usually
happens. At almost every company I studied, initial moves into new countries occurred in reaction to
proposals from potential distributors.

They would approach us at trade fairs or come directly to our oce, and if they seemed convincing,
we would be inclined to go ahead because the marginal cost was low and the distributor was bearing
most of the risk, says an executive from Loctite, the Connecticut-based specialty adhesives company
acquired by German chemical giant Henkel in 1997.

In fact, the most eager potential distributors may be precisely the wrong people to partner with. As
one executive from a leisure and sporting goods rm says, In many cases, we end up with the
distributors that also serve our two major competitors, because theyre in the strongest positions, by
far, with the retailers. Those distributors certainly have the market contacts, but they also want to
control the category and keep us three multinationals in balance. Incumbent distributors with strong
positions in the status quo are more likely to deliver a sales plateau, given their desire to maintain the
market structure.

Loctite now focuses rst on identifying the country, then nding a distributor. Being market-led
rather than distributor-led often results in our selecting a better distributor because of a more
systematic and thorough assessment of potential partners, the Loctite executive says. Even the
distributor search is market-led: Loctite contacts the largest potential customers and asks them to
name their preferred suppliers.

2. Look for distributors capable of developing markets, rather than those with a few obvious
customer contacts. The choice of distributors and the terms of the relationships should serve the
multinationals long-term goals. The most obvious distributor is not necessarily the best partner for
the long term, says a Loctite executive. Like most companies expanding internationally, Loctite used
to look for partners with the best market t, meaning those already serving major customer
prospects with similar product lines. But, says the executive, The closeness of the market t can be a
liability as well as an asset, because the distributors represent the markets status quo, and we are
selling a replacement technology and attempting to change the market.

The answer lies in the choice of partners. We increasingly look for what we have come to call
company ta partner with a culture and a strategy we feel comfortable with, in terms of the
investment theyll make, the training theyll give their people, and the support theyll ask from us,
says the Loctite executive. In many cases, this leads us to partners who have no experience of our
market. The rst couple of times, this felt risky, but our success with some of these partnerships has
made us bolder in choosing distributors.

In eect, this means bypassing the obvious choicea distributor who has the right customers and can
therefore generate quick salesin favor of a partner with a greater willingness to invest and an
acceptance of an open relationship that draws on the multinationals experience in marketing its own
products.

3. Treat the local distributors as long-term partners, not temporary market-entry vehicles. Structure
the relationships so that distributors become marketing partners willing to invest in long-term market
development. One traditional way of doing this is to grant national exclusivity to a distributor,
although such an agreement can become unproductive if conicts of interest arise once entry is
established. A more eective solution is to create an agreement with strong incentives for appropriate
goals, such as customer acquisition or new product sales. After all, the local distributor is the de facto
marketing arm of the multinational in its country.

Unfortunately, many companies actively signal to distributors that their intentions are only for the
short term, drawing up contracts that allow them to buy back distribution rights after a few years.
Such a strategy does avert one problemit prevents a distributor from claiming that the multinational
partner reneged on an earlier promisebut it creates other problems. Even with such a contract, a
distributor might simply decide not to sell back the rights and might well be backed up in the local
courts. In many countries, regulations favor local businesses over foreign vendors, so the
multinational could face a protracted struggle over distribution rights. Additionally, under a shortterm agreement, a local distributor doesnt have much incentive to undertake long-term business

development. The Asia-Pacic manager of a consumer goods company reported that several national
distributors, acting in the belief that sales revenues were the key to the reacquisition price, had cut
prices, boosting overall revenues but undermining the companys market positioning strategies.

4. Support market entry by committing money, managers, and proven marketing ideas. To retain
strategic control, multinationals must commit adequate corporate resources. This is especially true
during market entry, when corporations are least certain about their prospects in new countries.

Traditionally, multinationals have demonstrated commitment by sending in technical and sales

personnel or oering training to distributor employees. Such support is good, of course, but more
experienced corporations now go further and do things earlier. In markets regarded as strategically
important, theyve started to take minority equity stakes in autonomous distribution companies.
Although this increases exposure without achieving control, it opens the door to cooperative
marketing based on shared information, thus increasing the advantage and eectiveness of both the
multinational and the local partner.

Sometimes multinationals invest in distributors in ways that dont lead to co-ownership but that
demonstrate solid commitments to the relationships. A global leader in hydraulics components, for
example, now manufactures products according to the local technical standards in a new market and
bears some of the associated investment costs. Formerly, the company would have sold products with
incompatible specications or paid extra to manufacture specialty items.

For many corporations, such commitments in uncharted markets with independently owned
distributors represent unacceptable risks. But most multinationals already have eective controls for
managing independent distributors in home markets, and these might also be successful with
international distributors. Additionally, experienced multinationals have discovered that early
commitment of resources leads to better relationships with local distributors, thus enhancing
business performance. One European telecom company, for example, invested heavily in a service
organization; the company wanted to shift the distributors focus away from selling equipment (a
relatively easy task) and toward selling service (a more dicult one). The result has been higher sales
revenues and a more productive partnership with local distributors.

I nd it curious that multinationals are reluctant to commit resources at early stages. Once theyve
tested the market, multinationals almost invariably increase their commitments. My research
uncovered only rare instances of corporations withdrawing from countries theyd entered. So making
a commitment early isnt really a new strategy.

5. From the start, maintain control over marketing strategy. An independent distributor should be
allowed to adapt a multinationals strategy to local conditions. But multinationals should convene and
lead planning sessions and exercise authority about which products to sell, how to position them, and
budgeting. If corporations provide solid leadership for marketing, they will be in a position to exploit
the full potential of a global marketing network.

Multinationals committed to maintaining early control over marketing strategy nd that its important
to have employees on-site. Some send a few employees to work full-time at the local distributors
oces. Others establish country or regional managers who can keep a close watch on both distributor
performance and customer needs.

We used to give far too much autonomy to distributors, thinking that they knew their markets, says
one manager. But our value proposition is a tough one to execute, and time and again we saw
distributors cut prices to compensate for failing to target the right customers or to suciently train
salespeople.

6. Make sure distributors provide you with detailed market and nancial performance data. A
multinationals ability to exploit its competitive advantages in an emerging market depends heavily
on the quality of information it obtains from the market. In many countries, the distribution
organizations are the only sources of such information. A contract with a distributor must therefore
require detailed market and nancial performance data.

Not having these data can lead to serious problems. A global leader in hydraulic components, for
example, did not know that its Hong Kong distributor was achieving almost half its sales revenues
within mainland China, nor that the products were being sold for about half of their Hong Kong price.
When the multinational acquired the Hong Kong business and established a subsidiary, it also found
itself saddled with a demand for drastic price reductions in Hong Kong, an active parallel importing
problem, and discontented customers in China complaining about the lack of service support.

The reaction to a request for market and nancial data reveals a lot about a distributor. Most
distributors, of course, regard data like customer identication and price levels as key sources of
power in their relationships with suppliers. Several multinational executives said that the willingness
of potential distributors to provide such information was a prime indicator of whether successful
relationships could be achieved.

7. Build links among national distributors at the earliest opportunity. Although a multinationals
primary focus after entering a new country is establishing a customer base there, the company should
create links among its national distributors as soon as possible. The links may take the form of a
regional corporate oce or an independent network such as a distributor council. The transfer of
ideas within local markets can improve performance and result in greater consistency in the execution
of international strategies.

One executive of a sportswear company explained that although distributor councils originated for
defensive reasonsto minimize the risks of diversion or parallel importingother benets have
accrued: Once the distributors started talking, they also started planning. We soon had regional
initiatives for new products, with successful design based on the local market, and the scale required
to make them protable. There was also a noticeable decrease in the variation between products
manufactured by our national licensees.

Multinationals need to do a better job of selecting and working with local distributors. In particular,
they must understand that distributors are implementers of marketing strategy, rather than marketing
departments in the country-market. The result will be better working relationships, fewer plateaus
and crises, and more consistent growth in market share and sales revenues. Once corporations
Seven Rules of International Distribution
understand that they can control their international operations through better relationship structures
rather than simply through ownership, they might also nd longer-term roles for local distributors
within a regionalized approach to global strategy.
A version of this article appeared in the NovemberDecember 2000 issue of Harvard Business Review.

David Arnold is an assistant professor at Harvard Business School in Boston.

This article is about EMERGING MARKETS

FOLLOW THIS TOPIC

Related Topics: INTERNATIONAL BUSINESS |

Comments

SUPPLY CHAIN |

MARKETING

Leave a Comment

POST

0 COMMENTS

JOIN THE CONVERSATION

POSTING GUIDELINES
We hope the conversations that take place on HBR.org will be energetic, constructive, and thought-provoking. To comment, readers must sign in or
register. And to ensure the quality of the discussion, our moderating team will review all comments and may edit them for clarity, length, and relevance.
Comments that are overly promotional, mean-spirited, or off-topic may be deleted per the moderators' judgment. All postings become the property of
Harvard Business Publishing.

Seven Rules of International Distribution