designing marketing channels for global expansion

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Designing Marketing Channels for Global Expansion Palombo

Marketing Management Journal, Fall 2009 64

INTRODUCTION

The growth of international commercecontinues to grow at incredible rates. Virtuallyevery organization in the U.S. has considered

the possibility of international trade or isactively involved in the globalization of their

products. The advantages of servicing newmarkets is attractive to organizations,

particularly those that have stabilized ormatured and are seeking new growth avenues.Unfortunately, many businesses seek globalexpansion with little regard for the manyintricacies of other cultures, which includecultural differences and buying habits. In fact,many businesses believe they are forced toexpand globally due to competitive forces

which obligate them to retain their marketposition, thus leading these companies into anunsuccessful approach to international trade.Global expansion requires thorough researchand an acute understanding of the consumerwithin his or her respective culture. Developing

proper marketing channels is the catalyst toachieving international success.

The past decade has witnessed the growth ofthe internet, which has inspired increasednumbers of entrepreneurs. Advantages of theinternet include the ability of a smaller

organization on a limited budget to becomesuccessful as a global firm. However, manysmall to midsize organizations lack theresources to successfully market their productsto other countries, and frequently market their

products in an improper manner or incorrectmarket.

Most companies would prefer to remaindomestic if their domestic market were large

enough. Managers would not need to learnother languages and laws, deal with volatilecustomers, face political and legal uncertainties,or redesign their products to suit differentcustomer needs and expectations (Keller andKotler 2006).

Companies that venture into internationalbusiness must consider the preferences of theirforeign customers and their attraction to their

product. Companies must also be aware of thepolitical structure of the foreign countryincluding the countrys regulations and

potential unexpected costs. Also, the companymay not realize the need for managers withinternational experience, or consider theimplications of political turmoil or significantcurrency exchange changes (Keller and Kotler2006).

MARKETING CHANNELS

Companies that elect to expand internationallyare increasingly dependent upon theirmarketing channels. Marketing channels are

sets of interdependent organizations involved inthe process of making a product or serviceavailable for use or consumption. They are theset of pathways a product or service followsafter production, culminating in the purchaseand use by the final end user (Keller and Kotler2006).The Marketing Management Journal

Volume 19, Issue 2, Pages 64-71

Copyright 2009, The Marketing Management Association

All rights of reproduction in any form reserved

DESIGNING MARKETING CHANNELS

FOR GLOBAL EXPANSIONVINCENT J. PALOMBO, Chancellor University

The advantages of servicing new markets is attractive to organizations, particularly those that havestabilized or matured and are seeking new growth avenues. Unfortunately, many businesses seek globalexpansion with little regard for the many intricacies of other cultures, which include cultural differencesand buying habits. Global expansion requires thorough research and an acute understanding of theconsumer within his or her respective culture. Developing proper marketing channels is the catalyst toachieving international success.


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65 Marketing Management Journal, Fall 2009

Due in large part to the globalization of trade,competition among businesses has intensified;thereby contributing to the heightenedimportance of distribution in a firms overallmarketing strategy. While high quality

products, effective promotions, and competitivepricing have become ubiquitous, firms areincreasingly turning to distribution as a keystrategy of marketing differentiation. Thus,delivering the product to the final customerfaster and more efficiently than the competition

becomes a critical success factor (Anderson,Dubinsky, and Mehta 2003).

A marketing channel system is the particular setof marketing channels employed by a firm.Decisions about the marketing channel systemare among the most critical facing management.

One of the chief roles of marketing channels isto convert potential buyers into profitableorders, thus not simply serving a market butmaking a market (Keller and Kotler 2006).

The channels chosen affect all other marketingdecisions. The companys pricing depends onwhat type of channels are used, as channelmembers can collectively earn margins thataccount for 30 to 50 percent of the ultimateselling cost. The firms sales force andadvertising decisions depend upon how muchtraining and motivation is needed for channel

managers. In addition, channel decisionsinvolve relatively long-term commitments toother firms as well as a set of policies and

procedures (Keller and Kotler 2006).

INTERNATIONALMARKETING CHANNELS

In the current competitive climate, themotivation of international channel partners toachieve individual and collective goals is

becoming increasingly important. Morespecifically, motivation aimed at enhancing

performance of all channel partners becomescrucial to the effectiveness of interfirmalliances. This situation places a premium ofthe channel captains employing appropriateleadership styles that motivate internationalchannel partners to perform distribution tasksand marketing functions more efficiently and

effectively than their competitors (Anderson etal. 2003).

The choice to venture into internationalcommerce will require marketing channel

decisions. These decisions will affect thesuccess or failure of the expansion as thereliance upon aspects of the marketing channelare of critical importance, particularly incomparison to the marketing channels in

practice by a companys primary competitors.

Moreover, many companies are now seeking toestablish a value network, which is a system of

partnerships and alliances that a firm creates tosource, augment, and deliver its offerings. Avalue network includes a firms suppliers andits suppliers suppliers, and its immediate

customers and their end customers (Keller andKotler 2006).

The importance of the value network cannot beunderstated, as the development of business

partners is a critical component to anorganizations success and may lead to acompetitive advantage for the organization. Asuccessful value network provides fasterresponses and shortened lead times, improved

performance and quality, marketing advantages,and improved pricing resulting in increased

profitability.

By paying close attention to the strategic andtactical issues relating to delivery channels,companies greatly improve their chances of

being repaid in terms of significantly improvedrevenues and profitability (Morelli 2006).Because international channel partners cansignificantly influence a firms success orfailure in the long run, manufacturers are

becoming increasingly concerned about theperformance of the institutions they constituteamong their marketing channels. Moreover, thelevel of performance attained by their channel

partner is pivotal if a firm is to achieve acompetitive advantage (Anderson et al. 2003).

Successful global marketing channels require amix of a superior product, the diligence ofmarket researchers to determine the validity ofmarketing the product to a particular area, theselection and development of marketing


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channels and representatives, and propermotivational and leadership skills that arenecessary to drive success.

Marketing channels exist in many forms. Direct

channels provide a direct contact with thecustomer, such as a direct sales force, internetsales, or telephone sales. Indirect channelsrelate to the use of agents, dealers, distributors,franchising, licensing, or joint ventures.Organizations must carefully consider theimplications of each channel or consider the

possibility of using multiple options.

SELECTION OF AMARKETING CHANNEL

Choosing the correct channel is the crucial

component of international selling. Manyorganizations may change from one channel toanother until they become pleased with theresults. Other companies use a multi-facetedapproach, and then focus upon the successfulchannels. According to Morelli (2006), the

primary factors consist of how much control acompany wishes to have, how much of themarket a company wishes to cover, and whatcost factors relate to the planned or actual useof marketing channels (Morelli 2006).

The development of marketing channel partners

is similar to a supply chain management thatmany companies have adopted. Firms areincreasingly adopting a supply chain

philosophy referred to as relationship marketingin response to maturing markets, globalization,and greater competition. This approach tomanaging supply chain relationships viewsthese relationships as key assets of anorganization which allows firms to maintainand increase sales and to improvecommunications and better coordinate buyer-supplier relationships. These sorts of industrial

buyer-supplier relationships, characterized byrelatively long-term time horizons, non-marketmodes of governance and high levels ofcommitment and trust, have been viewed as adurable basis for competitive advantage (Carterand Morris 2005).

The dependence upon international marketingchannel partners places organizations in a

position where they are at the mercy of theirselected partners. U.S. organizations find itdifficult to service some countries which arereluctant to purchase from Americans, butwilling to accept American products.

Additionally, many American producers altertheir products to appeal to the tastes andpreferences of the buying customer. Whilelarge organizations are able to train and staff a

business with internal natives, smaller tomidsize companies are often reliant upon thedistributors in use.

Yet not all of these relationships lead tomutually beneficial results with some firms in adistributor-organization relationship actingopportunistically to gain greater benefits at theexpense of the other party. Others may show a

propensity to leave, particularly in response to ashort-term commitment or difficulties incooperation or decision-making (Carter andMorris 2005). Firms which are unable todevelop strong relationships with theirmarketing channel distributors will often sufferfrom inadequate exposure and possible failureto export, regardless of the product.

In any instance, building effective relationshipswith the marketing channel managers willeliminate most of the negative occurrences, butthese relationships are challenging to develop

due to the infrequency of personal contact.Ideally, organizations would develop internalcandidates with knowledge of the companysstrategy and culture who then have the ability totransfer these attributes to the productsdistribution. The challenge occurs in certainregions where it is necessary to use existingnatives familiar with the country who oftenreceive minimal training and are unaware of thecompanys legacy.

NICHE PRODUCTS: BERINGER WINE

Niche products are exceptionally difficult tomarket internationally as niche characteristicsare commonly high quality, higher priced

products. The appeal with niche products is theoccurrence of brand loyalty and customerloyalty. In their study of niche marketing ofwine, Goodman and Jarvis (2005) determinedthat niche products service a smaller customer


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base that shows higher loyalty and repeatpurchasing of the brand. Thus, a niche channelrequires the marketer to move to a customerrelationship management. This is difficult in aretail environment where the focus has to be on

establishing the niche product. If the companydevelops the niche product and establishes acustomer database, where customers are moreloyal, then the organization needs to undertakea relationship marketing approach (Goodmanand Jarvis 2005).

In September, 2002, Beringer Wine wasdeciding whether or not to pursue growththrough globalization of their wine products.Beringers wine was sold in the United Statesthrough a distribution system that includedwholesale distributors and retail outlets. Direct

shipping or selling via the internet was difficultdue to the legal requirements of selling acontrolled substance, resulting in the relianceupon distributors. Several U.S. wineries hadalready established joint ventures with foreign

partners in an effort to increase market share;create synergy with distribution channels,marketing, and sales; diversify productionsources and growing seasons; and reduce costs(Gamble, Strickland and Thompson 2005).

In response to their competitors, Beringerexecutives felt compelled to distribute their

wine globally. Reluctant to form internationalpartnerships, Beringer chose to establish adecentralized approach to global distribution bylocating managers within their region ofresponsibility to ensure that business decisionsare based on local market conditions andindividual customer requirements. Yet,Beringer CEO Walt Klenz indicated theuncertainty of Beringers global expansion bystating: We need a balance between globalvalues, that is, building a brand that is commonto all markets, while adapting to what everylocal market needs. How do we develop a seriesof core global brands at different price points,create a globally-oriented organizationalculture, revamp our product line to make itmore accessible to a new generation of wineconsumers, and build internal communicationssystems to support an increasingly complex

production marketing interface? (Gamble, et.al. 2005)

Klenzs uncertainty is a common reaction to thepressures many organizations face whenrealizing the need to become a global business.Decades ago, globalization was relegated tolarge organizations with the available resources

to evaluate effective marketing and distributiontechniques required to service individualcountries. Despite these available resources,many of these companies used a standardizationapproach that failed to capture the appeal of thelocal citizens. Currently, global expansion is nolonger limited to the few but is now acompetitive necessity for the majority ofcompanies, who are ill-equipped to afford afailure to expand.

INTERNATIONAL MARKETINGOPPORTUNITIES: FLETCHER COLE

Alternatively, some organizations embraceinternational expansion as the opportunity toovercome challenges. Fletcher Core, aColorado-based manufacturer of snowboardsand snowboard equipment, recognized the needto market their products in Europe. Fletcherdecided to expand operations by building adistribution center in Germany. This locationgives Fletcher easy access to the snow resortsof the Alps, a strong employee base thatunderstands Alpine conditions, and close

proximity to the Munich airport (Baker and

Roberts 2006).

Fletchers marketing and distribution avenuesare easily manageable as the Alps are verysimilar to the mountains in Colorado, thus

providing Fletcher with a confident approach toselling their products internationally. Fletcheralso limits their product to one particular regionand is able to build a distribution center in lieuof using foreign distributors. Fletchers abilityto maintain complete control provides anadvantage that other organizations are oftenunable to follow.

Fletcher Coles approach to globalization ishighlighted by their selection of a regionsimilar to their own. Frequently, businessesapproach globalization with an across the boardapproach designed to appeal to all countries.These approaches generally require the servicesof international distributors and a hit or miss


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approach to selling. Instead, many companiescan use the approach demonstrated by FletcherCole, and expand internationally in much thesame way that the company would expandlocally.

Adapting to the local preferences and culturescan be complex and difficult. Businessesdependant upon marketing channels mustadhere to the motivational needs of theirchannel managers. According to Dziobaka-Spitzhorn (2006), this can be achieved by trustand confidence. It is the managers task toevoke trust and faith in all team participants andits environment. Confidence in doing the rightthings and doing them right increases themotivation to contribute efficiently andeffectively to the project. Good performance

management can help launch an organizationinto a virtual cycle of success (Dziobaka-Spitzhorn 2006).

SAMSUNGS GLOBAL STRATEGY

The global marketplace is characterized byreduced trade barriers, intensified competition,shortened product cycle life, and deepeningindustrial segmentation. Samsung ElectronicCompany is one of the leading globalcompetitors worldwide. While other globalcompetitors progress at a marginal rate,

Samsung leaps forward with innovativemanagement and growth strategy (Kim 2007).

Since the beginning of Samsungs existence,the strategic intent has been to become a majorglobal competitor with a premium brand

position in the global market. Initially,Samsung positioned itself as the low end andlow quality producer. Samsungs strategicchoice of starting at the low end was basedupon environmental conditions including lownational income, limited purchasing power ofthe local market, and the availability of a niche-market export for low-end models (Kim 2007).

Samsungs marketing techniques minimized thenecessity of channels, as their approach was to

provide a lower cost product which wouldappeal to buyers. Samsungs strategy differsfrom those in the marketing industry which isspecific to a target market and subsequently

reliant upon proper channel techniques andmarketing strategies. Furthermore, culturalaspects favor producers in some countries asopposed to other countries.

CHANNEL RELATIONSHIPSAND CULTURAL DIFFERENCES

Inter-cultural relationships require trust,commitment, cooperation, and dependence inorder to become successful. In marketingchannels, channel structure refers to the

patterned or regularized aspects of relationshipsbetween channel part ic ipants . Theseparticipants depend upon each other in order toachieve their goals. Yet each partnersdependence on his or her channel partner isdetermined by the motivational investment in

the relationship. Motivational investment refersto the value of the resources or outcomesmediated by the other party (Ha, et al. 2004).

According to previous channel behaviorresearch, increased dependence creates morecooperative action in the channel memberrelationships. Channel members who dependupon the role performance of another are morelikely to exert greater effort to maintain therelationship. On the other hand, members whofeel less dependent are less inclined tocooperate (Ha, et al. 2004). Effective

relationship management and motivationalskills are needed to encourage channelmembers to achieve optimal performance.

However, cultural similarity or dissimilarityplays a large role in relationship managementtechniques. Cultural distance refers to theextent of which a culture is seen as beingdifferent from ones own. When culturaldistance is high, the language, laws, regulation,

business practices and consumer attitudes tendto differ. Cultural differences are often thesource of miscommunication between business

partners due to the extent in which alliancenegotiators know and understand each othersactions (Ha, et al. 2004).

Thus, it can be theorized that the success orfailure of marketing channels can be attributedin some ways to the existence of culturaldistance. For instance, the U.S., has less


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difficulty establishing marketing channels inCanada, a country in close geographical

proximity with few language or politicalbarriers, than in Iran, a country with significantcultural differences as well as geographical,

political, and language barriers.

CHANNEL MANAGEMENT STRATEGY

Strategies for effective channel management indifferent countries may well require the use ofcontrasting leadership styles. Several studieshave found that the cultural environment cansignificantly affect marketing channel structureand strategy and the relationships amonginternational channel partners. Seemingly, inorder for international channel strategies to besuccessful, channel leaders should take into

consideration the cultural context in which theyoperate (Anderson et al. 2003).

Further studies have concluded that distributionsystems in developed countries are much moremanageable than in developing countries.Marketing channels tend to be long indeveloping countries as serious financial andorganizational constraints hamper theorganization and distribution among membersin the marketing channel. Additionally, legalsystems and crime prevention are deficient, andcorruption is often a serious problem (Ghauri,

Lutz, and Tesfom 2004). These obstacles makeit difficult to establish a relationshipmanagement approach to marketing channelmanagement.

Many channel researchers suggest that behaviorin marketing channels can be characterized byrelational exchanges with a focus on long-term

payoffs. Over the past two decades, firms haveincreasingly resorted to relational exchanges asa means of attaining competitive advantage.Adoption of this philosophy will lead to thedevelopment of long-term buyer-sellerrelationships and the forging of strategicalliances and partnerships between channel

participants (Anderson et al. 2003).

These relationships are often reflected withinthe leadership style used by the channel leader.Successful leadership approaches often refer tothe extent of activity channel leaders exhibit

with their channel partners. Consequently, achannel leader using a particular leadershipstyle will manifest a certain degree of that style.Moreover, a channel leader may exhibit varyingdegrees of leadership styles concurrently or

have a greater propensity for using one styleinstead of another (Anderson et al. 2003).Channel partners who accept an active role inchannel management are aptly motivated to

participate in the success of the channel.

INTERNETDISTRIBUTION STRATEGIES

The spread of the internet as a successfulmedium of communication and exchange has

broadened the scope of doing business to theglobal market place. The internet is a global

phenomenon in which fortune will favor trulyglobal players. Substantial market shares withinone set of territorial or market boundaries havestarted to become meaningless in a globalcontext. On the other hand, nichesunsustainable within purely domestic markets

become viable in an electronic networkedenvironment (Mehta 2008).

For U.S. organizations, internet exposure hasprovided the opportunity for manyorganizations to develop marketing channelsthrough customer relationships. On the basis of

customer service quality, long-termrelationships may be forged or even strategicchannel alliances can be formed. Internationalmanagers should be well aware of the needs oftheir intermediary channel customers and fine-tune their customer service qualitymeasurements (de Ruyter, Lemmink andWetzels 2000).

While the internet cannot eliminate or replacethe classical functions performed within amarketing channel, the internet can restructurethem. In itself, the internet has become adistribution channel for products and services,with the components of speed, interaction andflexibility. As a distribution channel, theinternet provides a portal for communication

between the buyer, the seller, and the entiredistribution phase of the physical item. Theinternet offers the marketing channel potentialof eliminating some of the marketing costs and


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combines in the shrinking of the channel andmaking distribution much more efficient(Gurau, Ranchhod and Hackney 2001).

Distributors are increasingly squeezed between

the competing needs to reduce operational costswhile maintaining or increasing customerservice. As competitive, price-driven marketshave forced down prices and margins,organizations must do more with less. Due tothe price transparency that the internet

provides, it drives power down the channel tothe customer (Finch and Frickenstein 2006).Thus, the internet provides the customer withthe opportunity to establish a reverse marketingchannel in which the customer determines the

preferred channel route that the organizationshould follow.

The increased use of the internet as a marketingchannel and the continued growth of global

business have led to diminishing culturaldifferences and a worldwide open tradingsystem excluded by only a few countries.Business leaders continue to develop marketsthat were once considered unattainable andconsumers have an abundance of productchoices available in an astoundingly quickfashion.

However, many established global companies

fear that the internet has the potential to hurtthem; to be competence destroying instead ofcompetence enhancing; compromise theirdistribution network assets rather than leveragethem; and disrupt their industry leadership

positions rather than reinforce their dominance.Thus, global corporations are faced withchallenges created ny the use of the internet asa new distribution channel (Mehta 2008).

CONCLUSION

Globalization is one of the many optionsavailable to organizations, but it is not anecessity for future success. The more criticalissue for survival is whether it has its ownstrategic advantages over its competitors tomeet the dynamics of the domestic and globalmarkets. If a business finds that globalization isconsistent with its strategic advantages, it is

critical to analyze this and other options (Moon2005).

Ultimately, organizations that choose to enterinto international business must closely align

themselves with the proper locale andthoroughly investigate the preferred marketingchannels which will appeal to consumers.Diligent marketing channel selection andrelationship building can drive a product tosuccess.

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Anderson, Rolph, Alan Dubinsky and RajivMehta (2003), Leadership Style, Motivationand Performance in International MarketingChannels: An Empirical Investigation of the

US, Finland and Poland, European Journalof Marketing, Vol. 37,Iss. 1/2, pp. 50-78.

Baker, William, and F. Douglas Roberts (2006),Managing the Costs of Expatriation,Strategic Finance, Vol. 87, Iss. 11,pp. 35-42.

Carter, Craig, and Matthew Morris (2005),Relationship Marketing and SupplierLogistics Performance: An Extention of theKey Mediating Variables Model, Journal ofSupply Chain Management, Vol.41, Iss. 4,

pp. 32-44.De Ruyter, Ko de, Jos Lemmink and Martin

Wetzels (2000), Measuring Service Quality

Trade-Offs in Asian Distribution Channels: AMulti-Layer Perspective, Total Quality

Management, Vol. 11, Iss. 3, pp. 307-319.Dziobaka-Spitzhorn, Verena (2006), From

West to East: How the Worlds LargestRetailer Drives its Global Expansion,

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John Gamble, A.J. Strickland and ArthurThompson (2005), Crafting and ExecutingStrategy (14thed.). New York, NY: McGraw-Hill.


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Ghauri, Perves, Clemens Lutz and GoitomTesfom (2004), Comparing ExportMarketing Channels

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