Transcript of "Chapter 11 – international marketing channels"
Chapter 11 – International Marketing Channels2. Discuss the distinguishing features of the Japanese distribution system. Distribution in Japan has long been considered the most effective non-tariff barrier to the Japanese market. The distribution system is different enough from its United States or European counterparts that it should be carefully studied by anyone contemplating entry. The Japanese system has four distinguishing features: 1) a structure dominated by many small wholesalers dealing with many small retailers; 2) channel control by manufacturers; 3) a business philosophy shaped by a unique culture; and 4) laws that protect the foundation of the system, the small retailer. High Density of Middlemen. There is a density of middlemen, retailers and wholesalers in the Japanese market unparalleled in any Western industrialized country. The traditional structure serves consumers who make small, frequent purchases, at small conveniently located stores. The high density of small stores with small inventories is supported by an equal density of wholesalers. It is not unusual for consumer goods to go through three or four intermediaries before reaching the consumer—producer to primary, secondary, regional, and local wholesaler, and finally to retailer to consumer. Channel Control. Manufacturers depend on wholesalers for a multitude of services to other members of the distribution network. Financing, physical distribution, warehousing, inventory, promotion and payment collection are provided to other channel members by wholesalers. The system works because wholesalers and all other middlemen downstream are tied to manufacturers by a set of practices and incentives designed to ensure strong marketing support for their products and to exclude rival competitors from the channel. Business Philosophy. Coupled with the close economic ties and dependency created by trade customs and the long structure of Japanese distribution channels is a unique business philosophy that emphasizes loyalty, harmony, and friendship. The value system supports long-term dealer/supplier relationships that are difficult to change as long as each party perceives economic advantage. The traditional partner, the insider, generally has the advantage. Large-Scale Retail Store Law. Competition from large retail stores has been almost totally controlled by Daitenho–the Large-Scale Retail Store Law. Designed to protect small retailers from large intruders into their markets, the law requires that any store larger than 5,382 square feet (500 square meters) must have approval from the prefectural government to be “built, expanded, stay open later in the evening, or change the days of the month they must remain closed.” All proposals for new “large” stores are first judged by MITI (Ministry of International Trade and Industry). Then, if local retailers unanimously agree to the plan, it is swiftly approved. However, without approval at the prefecture level (all small retailers in the area must agree), the plan is returned for clarification and modification that may take several years (ten years is not unheard of) for approval. Besides the large-scale retail store law, there
are myriad licensing rules. One investigation of the regulations that governed the opening of a retail store revealed 39 different licenses, each with a separate law, needed to open a full- service store.3. Discuss the ways Japanese manufacturers control the distribution process from manufacturer to retailer. Manufacturers depend on wholesalers for a multitude of services to other members of the distribution network. Financing, physical distribution, warehousing, inventory, promotion and payment collection are provided to other channel members by wholesalers. The system works because wholesalers and all other middlemen downstream are tied to manufacturers by a set of practices and incentives designed to ensure strong marketing support for their products and to exclude rival competitors from the channel. Wholesalers typically act as agent middlemen and extend the manufacturer’s control through the channel to the retail level. Control is maintained by: 1) inventory financing, sales made on consignment with credits extending for several months; 2) cumulative rebates, rebates given annually for any number of reasons including quantity purchases, early payments, achieving sales targets, performing services, maintaining specific inventory levels, participating in sales promotions, loyalty to suppliers, maintaining manufacturer’s price policies, cooperation, and contribution to overall success; 3) merchandise returns, all unsold merchandise may be returned to the manufacturer; and, 4) promotional support, intermediaries receive a host of displays, advertising layouts, management education programs, in-store demonstrations, and other dealer aids which strengthen the relationship among middlemen and the manufacturer.4. Describe the large-scale retail store law found in Japan and show how the Structural Impediments Initiative (SII) is bringing about change in Japanese retailing. Competition from large retail stores has been almost totally controlled by Daitenbo, the Large-Scale Retail Store Law. Designed to protect small retailers from large intruders into their markets, the law requires that any store larger than 5,382 square feet (500 square meters) must have approval from the prefectural government to be built, expanded, stay open later in the evening or change the days of the month they must remain closed. All proposals for new large stores are first judged by MITI (Ministry of International Trade and Industry). Then, if local retailers unanimously agree to the plan, it is swiftly approved. However, without approval at the prefecture level (all small retailers in the area must agree), the plan is returned for clarification and modification that may take several years (10 years is not unheard of) for approval. Designed to protect small retailers against competition from large stores, the law has been imposed against both domestic and foreign companies. It took ten years for one of Japan’s largest supermarket chains to get clearance for a new site. Toys `R’ Us fought rules and regulations for over three years before it gained approval for a store. Besides the “large-scale retail store” law, there are myriad licensing rules. One investigation of the regulations governing the opening of retail stores uncovered 39 different laws, each with a separate license that had to be met to open a full-service store.
Agreements between the United States and Japan under the Structural Impediments Initiative (SII) have had a profound impact on the Japanese distribution system by leading to deregulation of retailing and strengthening rules on monopoly business practices. The retailing law has been relaxed to permit new outlets as large as 1,000 square meters without prior permission and limits on store hours and business days per year have also been lifted. Officially relaxing laws and regulations on retailing is but one of the important changes signaling the beginning of profound changes in how the Japanese shop. The SII negotiations to pry open new markets for American companies is producing strong evidence of cracks in the system. Japanese businesspeople are challenging the traditional system and Japanese consumers are undergoing a change in attitude toward shopping and traditional retailing by responding favorably to bargain prices. SII and deregulation will undoubtedly have a part in changing Japanese distribution practices but those merchants willing to challenge traditional ways and give the consumer quality products at competitive, fair prices will bring about the demise of the way department stores and small shops wedded to the traditional distribution system operate. Specialty discounters are sprouting up everywhere and entrepreneurs are slashing prices by buying direct and avoiding the distribution system altogether. Japanese consumers, described as brand loyal and more interested in services and quality than price, seem to be willing accomplices to the changes taking place and understandably so. The Japanese consumer has traditionally paid the highest prices in the world for the goods they buy. Before Toys `R’ Us changed the price levels, toys in Japan cost four times as much as toys in any other country. Japanese-made products imported to the United States can be purchased in the U.S. for less than they cost in Japan. Such inequities did not seem to matter to the Japanese consumer when they had no other alternatives. But, more often now, the Japanese consumer has a choice of prices for everything from appliances to beer. The “new” retailers are relatively small and account for no more than three percent of retail sales, compared with 14 percent for all specialty discounters in the U.S. But their impact extends beyond their share of market because they are forcing the system to change. Traditional retailers are modifying marketing and sales strategies in response to the new competition as well as to take advantage of changing Japanese lifestyles. There are also indications that some wholesalers are modernizing and consolidating operations as retailers demand to buy direct from the manufacturer or from the largest wholesalers. The process is slow because the characteristics of the distribution system are deeply rooted in the cultural history of Japan.5. “Japanese retailing may be going through a change similar to that which occurred in the United States after World War II.” Discuss and give examples. Japanese retailing may be going through a change similar to that which occurred in the United States after World War II. At that time the U.S. retailing structure was made up of many small retailers served by a multilayered wholesaling system and full service department stores and specialty stores offering all the needs of the shopper from soup to nuts including a long list of “services.” Resale price maintenance laws (also referred to as fair trade laws) allowed national manufacturers to dictate high retail prices necessary to support an inefficient
distribution system and amenities, i.e., “services,” which, when offered the opportunity, the consumer was willing to give up for lower prices. High margins were an attraction to the discounter who offered few, if any services and priced items well below manufactured suggested prices. Department stores and other “traditional retailers” fought back with attempts to enforce fair trade laws. When that failed, they also began to discount items but found they could not continue to operate in the old way with discounted prices. At that point, retailing in the United States began to change. Some traditional stores went out of business, others down-sized and dropped entire lines, others reinvented themselves into different operations and many of the small “mom and pop” stores went out of business. Thus began a retailing revolution that ultimately spawned new types of retailers like Wal-Mart, Kmart, Target, Price/Costco, Levitz Furniture, Best, Toys `R’ Us, and a whole host of other retail store types that did not exist a few decades earlier. If retailing follows a similar pattern in Japan, as it appears to be doing, Japanese retailing will not be recognizable in a decade or two. What seemed to be an impenetrable retailing system just a few years ago now appears to be on the verge of opening up and creating opportunities for U.S. marketers.6. Discuss how the globalization of markets, especially Europe 1992, will affect retail distribution. There are some important trends in distribution systems that will lead to their eventual globalization. That is, there is greater commonalty than disparity among middlemen in different countries. U.S. based Southland Corporation’s 7-Eleven Stores are replacing many of the traditional “Mom and Pop” stores that have dominated a significant part of Japan’s retail food distribution. In Spain, 7-Eleven and Campsa, the Spanish gasoline monopoly, opened 200 7-Eleven minimarkets at Campsa service stations. Hypermarkets, a retailing innovation developed in France, have expanded beyond French borders to other European countries and to the United States. Discount, home repair, self-service, and supermarkets are all mass merchandising concepts gradually spreading all over the world. In anticipation of Europe 1992, national and international retailing networks are developing throughout the world. European integration, global brands, globalized media communications, consumers that expect rational and predictable product assortments, and global companies anxious for their products to be distributed in the most efficient manner are factors driving a growing number of traditional distribution channel members to greater efficiencies and competitiveness. Many are developing into transnational, if not global, operations. Global products require integrated, efficient distribution systems to achieve maximum effectiveness.7. To what extent, and in what ways, do the functions of domestic middlemen differ from their foreign counterparts? The functions of the domestic and foreign middlemen are quite similar in many areas, but there are certain differences. First, the domestic agent usually takes possession of the goods, whereas the foreign agent does not. In the area of setting prices, the domestic agent has the authority to do so, while his foreign counterpart does not. Both types of domestic middlemen arrange for the shipping of goods, but the foreign middlemen do not. Two other differences exist between foreign and domestic agents. The domestic agent does some promotion and selling, and occasionally extends credit. On the other hand, foreign agents usually do not
participate in these activities.8. Why is the EMC sometimes called an independent export department? The EMC is sometimes called an international marketing department. There are several reasons for this title. First, many of the firms it represents are small and cannot afford extensive overseas marketing themselves. They must rely on the EMS. The EMC does business in the name of the manufacturer. This includes not only normal selling activities, but also active promotion, provision of credit information, physical handling, and even financing. In this light the EMC appears to be an independent marketing arm of the manufacturer.9. Discuss how physical distribution relates to channel policy and how they affect one another. Two extremely different channel policies exist in various areas which affect physical distribution. For example, in Turkey the buyer must seek out the seller with very little service offered by the latter. This is an example of the marketing channel working backwards. The normal policy is for the seller to seek out the buyer, excluding the retail market, and for the seller to offer a whole range of services. In some areas, middlemen are characterized by specialization. This practice tends to make the distribution process overly complex. Another channel policy found in many countries is the existence of huge middlemen and tiny middlemen with no one in between these two. The large ones tend to be very efficient in distribution, while the other is not. In most countries other than the United States and U.S.S.R., channel length is very long. This slows up the physical distribution of goods. Often, distribution of goods is slowed up because of low inventories caused by the high cost of money. It is unprofitable to maintain a large stock of goods.10. Explain how and why distribution channels are affected as they are when the stage of development of an economy improves. As an economy advances, the distribution system begins to take the form of distribution in the U.S. The apparent reason for this change in structure is due to the decentralization of the total marketing function. As an economy becomes more sophisticated it places increasingly complicated and sophisticated demands upon the marketing function. This results in modification of the existing system to be able to meet the increased demand placed upon it by the emerging economy. Consumer segments become much larger and diversified and each in turn places new demands on the distribution system which causes modification in order to administer to the requirements of that segment.11. In what circumstances is the use of a EMC logical? The export management company is the logical choice of middlemen for firms with relatively small international volume or for those that do not want to involve their own personnel in the international function.12. In what circumstances are trading companies likely to be used? Trading companies are likely to be employed when adequate coverage of a market, market access, or political acceptability is not possible by one firm. This would be the case in trade between developed and underdeveloped countries as well as between Western nations and the
former Communist bloc countries.13. How is the distribution channel structure affected by increasing emphasis on the government as a customer and by the existence of state trading agencies? The growth of government both as a user and as a middleman has placed new emphasis on marketing to monopsonies. Government is especially important in dealing with industrial goods and commodities. Facilitating middlemen are often used to gain advantage from their strong government contacts and ability to cut red tape. In general government dealings call for short channels with direct contact or one local middleman at most.14. Review the key variables that affect the marketer’s choice of distribution channels. The four main variables which affect the marketer’s choice of distribution channels are (1) the availability of middlemen, (2) the cost of their services, (3) the functions performed (and the effectiveness with which each is performed) and (4) the extent of control which the manufacturers can exert over the middlemen’s activities.15. Account, as best you can, for the differences in channel patterns which might be encountered in a highly developed country and an underdeveloped country. The attitude toward the middlemen in underdeveloped countries is generally negative, whereas his or her place in developed countries is accepted. This feeling in underdeveloped areas exists because the people emphasize production and consider the middleman unproductive. The result is often that this function is done on the side or secretly, which makes distribution overly difficult. Also, distribution is done on a small scale, whereas developed countries are often characterized by the extremely large middlemen. The poor nations live on a subsistence level. They are not so dependent on trade as developed countries are. Therefore, the importance of distributors is low. Distribution is slow and inefficient in underdeveloped countries because the population is widely scattered, inventories are low (high cost of capital), the middleman is very small, and margins are high. The developed nations are generally of opposite character.16. “One of the first things companies discover about international channel of distribution patterns is that in most countries it is nearly impossible to gain adequate market coverage through a simple channel of distribution plan.” Discuss. A single channel of distribution is often unavailable in foreign countries. One reason is that the channels used may be very unfamiliar to the producer and only seem to be complicated. More realistic reasons may be true in financial arrangements or the unavailability of middlemen. In many countries, middlemen may be specialists in either product or market area or both. If this is the case, several different middlemen are needed to distribute a single product in a country or to distribute several products within a single contiguous area.17. Discuss the various methods of overcoming blocked channels. Buying equity in the middlemen and thereby gaining entrance to the channel. Buying distribution through wide margins, contract bonuses, and other forms of cash settlements will unblock the channel.
Seeking alternative channels or new channels can get around the dilemma. The most expensive means is for the company to build its own channel.18. What strategy might be employed to distribute goods effectively in the dichotomous small-large middleman pattern which characterizes merchant middlemen in most countries? The strategy in this situation is no different than it would be in the United States in that selection of wholesaler middlemen should be based on at least two criteria. One, to whom the wholesaler sells or distributes, i.e., selects a wholesaler to reach a specific target market and the cost efficiency of a particular wholesaler middleman. In most countries if complete distribution of your goods is to be achieved, both small and large middlemen must be utilized to effectively reach all segments of the market. However, the smaller middlemen may be sufficiently inefficient to increase the cost of distribution thereby increasing the cost of the product to a point that it is no longer priced competitively.19. Discuss the economic implications of charging termination penalties or restricting the termination of middlemen. Do you foresee such restrictions in the United States? Termination penalties restrict the freedom of marketers to adjust to changing needs of the market and therefore reduce market efficiency. Such restrictions may stultify company growth and restrict its flexibility. Risk taking and experimentation are minimized because the marketer has a difficult time terminating experimental channels that fail. There are indicators and a few legal precedents restricting manufacturer’s middleman termination in the United States but growth of such restriction has been slow and cautious.20. Discuss why Japanese distribution channels can be the epitome of blocked channels. Distribution in Japan has long been considered the most effective non-tariff barrier to the Japanese market. The distribution system is different enough from U.S. or European countertrades to give an advantage to domestic competitors. The Japanese system has three layers (1) a structure dominated by small wholesalers dealing with small retailers, (2) unique trade customs, and, (3) a philosophy shaped by unique culture. It is not unusual for consumer goods to go through three or four intermediaries before reaching the consumer producer—the primary, secondary, regional and local wholesaler, and finally to retailers and consumers. The high degree of fragmentation and specialization makes it difficult to go direct and thus forces a manufacturer to rely on middlemen with an elaborate set of trade customs. Traditions unknown to the U.S. marketer make these channels the epitome of blocked channels.21. What are the two most important provisions of the Export Trading Act of 1982? The two most important provisions of the Export Trading Act of 1982 are that companies are exempt from Sherman Antitrust violations for their activities as an export trading company for sales of products outside the United States. This exemption is given by the Department of Commerce as a certificate which enables the export trading company to have the added assurance that the export program in which they are engaging will not be challenged by the courts. The second provisions of the Export Trading Act is that financial institutions, i.e., banks, can be owners of export trading companies. Prior to the ETC act, banks were not