Companies entering markets in developing

countries learn quickly that they need to

work with local distributors-but those

partnerships nearly always blow up in

the end. Much ofthe blame lies with the

multinationals themselves. They need to

understand how their new partners are

different from the ones at home.

Seven Ruleso/lnternationalDistribution

by David Arnold

A N ESTABLISHED CORPORATION LOOKING FOR

/ \ new international markets makes a foray into an/ \ emerging market, carefully limiting its exposureby appointing an independent local distributor. At first,sales take off, revenues grow pleasingly, and tbe entry ispraised as a smart move. But after a wbile, stagnationsets in and sales plateau. Alarmed, tbe multinational'smanagers try to discover wbat happened. They soon set-tle on wbat tbey perceive to be tbe main obstacle to sus-tained growtb: the local distributor that got the com-pany off to a flying start bas run out of ideas and is nowunderperforming.

This pattern is repeated again and again as multina-tionals expand into new markets in developing countries.Over time, a corporation's executives decide tbat thedistribution organization isn't run as they would like.They rush in and make major changes, in some cases buy-ing the local distributor or, more often, reacquiring tbe

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Seven Rules of International Distribution

distribution rights and starting their own subsidiary. Ineither case, it's messy. A transition from indirect to directsales is usually costly and disruptive. It can also createnew problems that come to the surface only in the longterm: executives may discover a few years later thatthey've gone too far in correcting a number of situationslike this, saddling the multinational with a dense andinefficient network of national distributors.

The frustrations are summed up by the CEO of amajor U.S. specialty cbemical company: "In the end, wealways do a better job witb our own subsidiaries: sales

of local intermediaries, corporations need to partnerwith local distributors to benefit from tbeir unique ex-pertise and knowledge of their own markets. Tbe multi-nationals know that on their own, they cannot masterlocal business practices, meet regulatory requirements,hire and manage local personnel, or gain introductionsto potential customers.

At the same time, the multinationals want to mini-mize risk. Tbey do tbis by hiring local distributors and in-vesting very little in tbe undertaking. Tbus, the compa-nies cede control of strategic marketing decisions to the

Neither the multinational nor the distributor invests sufficiently in strategicmarketing or in aggressive business development in these less-developed markets.

improve, and we have greater control over the business.But we still need local distributors for entry, and we arestill searcbing for strategies to get us tbrougb tbe tran-sitions without battles over control and performance."

I examined tbis pattern of imbalance and correction ina two-year field study of eigbt corporations in tbe con-sumer, industrial, and service sectors. Tbese companieshad entered almost 250 new country-markets, and Ilooked at tbeir international distribution strategies intbese markets. The research showed that avoiding thepattern of under performance and correction meant ac-cepting that, in most cases, tbe problem wasn't as simpleas the distributor's being poorly run. I learned tbat a cor-poration could avoid this scenario by overseeing mar-keting strategy from the start. Below, I'll look at whatgoes wrong with most distribution arrangements in de-veloping countries and then present seven guidelinesto head off potential problems. In the long run, multi-nationals come to see that it makes sense to continueworking with independent local distributors wbo handlesales and a distribution system, even after the interna-tional companies have taken control of marketing strat-egy and major global accounts.

What Goes Wrong and WhyMost multinationals stumble onto a stepwise strategy forpenetrating markets in emerging countries tbrough a se-ries of unplanned actions to reinvigorate sales. As thepattern recurs witb entries into subsequent markets, tbisapproach, dubbed the "beachhead strategy," becomes of-ficial policy in many organizations.

On the surface, tbe strategy makes a certain amountof sense. Multinationals start from scratch in sales anddistribution when tbey enter new markets. Since mar-kets are nationally regulated and dominated by networks

David Arnold is an assistant professor at Harvard BusinessSchool it\ Boston.

local partners, mucb more control than they would cedein home markets.

Nevertheless, as tbe CEO of tbe chemical companypoints out, up to now many multinationals have even-tually wanted to control tbeir own operations tbrougbdirectly owned subsidiaries; they're seeking the econo-mies of scale and control obtainable across a global net-work of marketing operations. For many multinationals,it's a foregone conclusion that local distributors bavemerely been vehicles for market entry, temporary part-

IS THERE A FUTURE FOR

For distributors in emerging markets seeking to sell multi-

nationals'products, my research findings 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.

The track record of distributors in new markets seems to sup-

port this bleak view: in thegreatmajority of cases, multination-

als bought or fired their distributors at some point during the

partnerships or created their own direct-sales subsidiaries. In

only 5% of the 250 cases I studied, multinationals switched to

new distributors.

A few distributors have managed to continue as representa-

tives of multinationals over the long run (in some cases, for

more than ten years). Most, it's 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.

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Seven Rules of International Distribution

ners incapable of sustaining growtb in tbe long term.(For a discussion of distributors' long-term prospects, seetbe sidebar "Is There a Future for Local Distributors?")

However, most managers don't admit tbis. Instead,tbey find fault witb tbe ways local distributors run theirbusinesses. If you ask managers of multinationals wbattypically goes wrong, you'll hear one of tbree tbings -and sometimes you'll bear all of them.

"The distributor didn't know how to grow the market"In many cases, distributors achieve initial sales growtbby "picking tbe low-hajiging fhiit"-making easy sales oftbe multinationals' proven, core products to tbe distrib-utors' existing customers. When tbe business cballengeshifts to introducing additional products or penetratingmarket segments in whicb tbe distributors aren't estab-lished, corporations say distributors don't bave the nec-essary skills.

"The distributors didn't invest in business growth" Atthe start, corporations often grant distributors nationalexclusivity in order to encourage investment. In addition,corporations and local distributors sometimes negotiatecontracts stipulating minimum levels of marketing in-vestment by the distributors. Nevertheless, multinationalmanagers still don't think distributors invest enough.

"The distributor Just wasn't ambitious enough." In somecases, managers of multinationals attribute tbe sales

plateau to a lack of drive by distribution organizations,which in emerging markets tend to be privately owned.To paraphrase many managers, "The typical distributoris looking not for market domination but for a stable,midsize business that will make it wealthy but is not toobig for it to control personally."

Predictably, tbe local partners often bave tbeir ownideas about why the relationships don't succeed over tbelong haul: "Tbey didn't give us enough support for grow-ing tbe business." "They expected the impossible." "Theircompany politics were too complicated." And so on.

The mutual finger-pointing overlooks a point thatseems obvious as tbe same tbemes repeatedly emerge:neither party-the multinational nor the distributor-invests sufficiently in strategic marketing or in aggressivebusiness development in these less-developed markets.It may be smart for corporations to minimize risk whenentering the markets, but a subsequent lack of invest-ment and managerial attention can seriously bamperperformance.

Multinationals don't set out to neglect tbese markets,of course. Wbat's needed always changes during andafter market entry, but companies don't adjust theircommitments accordingly. As a business grows in an in-ternational market, marketing strategy evolves, and eachsequential phase requires management resources specific

LOCAL DISTRIBUTORS?

> They carried product lines that complemented, rather

than competed with, the multinationals' products.

> 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 risked

investing in areas such as training, infornnation systems,

and advertising and promotion in order to grow the

multinationals' businesses.

Multinationals clearly prefer to control their international

marketing operations, so such characteristics can't guarantee a

long-term role for even the most effertive national distributor

But, at the very least, a distributor whose leaders participate

actively in strategic marketing will be valuable to the multina-

tional and will be able to command a high price if the corpora-

tion seeks to buy back its sales and distribution business.

More generally speaking, though, the future of independent

distributors wilt be influenced by the growing regionalization

of marketing management. Many companies are developing

international marketing organizations structured around prod-

uct groups or market sectors, and regional management of

marketing strategy flows naturally out of that reorganization.

This happens for two reasons. First, networks of directly owned

national distributors are inefficient; they duplicate managerial

resources at the country level and lead to missed opportunities

in areas such as Information systems and promotional expendi-

tures. Second, regionalization gives multinationals greater stra-

tegic control.

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, indepen-

dent, 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

control: independent local distributors often provide the best

means of serving local small and medium accounts.

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Seven Rules of International Distribution

to the task, different skills, and financial investment.Jtequirements at the outset are very different from thosethree to five years later. The multinational's product lineand the distributor's business probably fit best at thepoint of market entry. As time passes, the fit deteriorates.The distributor may be less able to deliver growth as thebusiness moves away from its core customer base.

Nevertheless, I think there are ways in which localdistributors can continue to contribute after marketentry; the economic reasons for the existence of distrib-utors do not disappear after subsidiaries are established.The key to solving the problems of international distri-bution in developing countries is to recognize that thephases are predictable and that multinationals can pianfor them from the start in a way tbat is less disruptiveand costly than the doomed beachhead strategy. (Seethe exhibit "Managing the Multinational-DistributorPartnership")

Managing the Life Cycleofthe International DistributorThe multinationals I studied made trade-offs amongthree worthy objectives: wanting to control tbeir busi-ness expansion at a strategic level; partnering with local

distributors, at least for the first years, to benefit fromthe locals'expertise; and minimizing costs and risks inthese new ventures.

These are all good objectives, but finding the correctbalance among them at any particular time is tricky. Inthe beginning of market entry, partnerships with localdistributors make good sense: distributors know tbe dis-tinctive characteristics of their markets, and most cus-tomers prefer to do business with local partners. Changesduring later phases of market entry, including a possibleswitch to directly controlled distribution, are usually cor-rective moves to redress imbalances that emerged duringthe initial phases, and many of these changes lead tonew imbalances. The following guidelines caii help exec-utives of multinationals anticipate and correct potentialproblems.

1. Select distributors. Don't let them select you.A foray into a new international market should be theresult of a strategic decision based on an objective mar-ket assessment. But that's not how it usually happens. Atalmost every company I studied, initial moves into newcountries occurred in reaction to proposals from poten-tial distributors.

"They would approach us at trade fairs or come di-rectly to our office, and if they seemed convincing, we

MANACtNG THE MULTtNATIONAL-DISTRIBUTOR PARTNERSHIP

We follow two hypothetical multinational corporations (MNCs) as they enter new markets in developing countries. The marketsand countries are comparable, but M NCI follows a beachhead strategy, reacting to problems as they come up. This strategyculminates in a serious disruption of business. In contrast, MNC2 retains control of marketing strategy from the outset andanticipates changes.

Approached by anindependent localdistributor, MNClagrees to test themarket in thedistributor's country.

Based on objectiveassessments, MNC2chooses a market.

MNCl considersthe distributor anappropriate partnerbecause the distri-butor is alreadyserving customerswith productssimilar toMNCl's.

Rather than seekinga distributor with agood "market fit,"MNC2 looks for onewith a good "companyfit"- a culture andstrategy compatiblewith Iv1NC2's own.

tt views thedistributor asa temporarymarket-entryvehicle.

It encourages thedistributor's leadersto initiate marketingand developmentprojects in coopera-tion with MNC2'smanagement.

Seeking to avoidrisk, MNCl makesa minimal financialcommitment tothe endeavor.

MNC2makesasubstantial commit-ment of corporateresources up front,despite uncertaintyabout the market'sprospects.

It delegates salesand marketingresponsibility tothe independentdistributor.

It retains controlof marketingstrategy andworks with thelocal distributoron marketdevelopment.

Time*

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Seven Rules of International Distribution

would be inclined to go ahead because the marginal costwas low and the distributor was bearing most of therisk," says an executive from Loctite, the Connecticut-based specialty adhesives company acquired by Germanchemical giant Henkel in 1997.

In fact, the most eager potential distributors may beprecisely the wrong people to partner with. As one ex-ecutive from a leisure and sporting goods firm says, "In

tributor because of a more systematic and thorough as-sessment of potential partners" the Loctite executivesays. Even the distributor search is market-led: Loctitecontacts the largest potential customers and asks themto name their preferred suppliers.

2. Look for distributors capable of developing mar-kets, rather than those with a few obvious customercontacts. The choice of distributors and the terms ofthe

The key to solving the problems of international distribution in developing countries isto recognize that the phases are predictable and that multinationals can plan for them.

many cases, we end up with the distributors that alsoserve our two major competitors, because they're in thestrongest positions, by far, with the retailers. Those dis-tributors certainly have the market contacts, but theyalso want to control the category and keep us threemultinationals in balance." Incumbent distributors withstrong positions in the status quo are more likely to de-liver a sales plateau, given their desire to maintain themarket structure.

Loctite now focuses first on identifying the country,then finding a distributor. "Being market-led rather thandistributor-led often results in our selecting a better dis-

Dissatisfied withperformance afterinitial sales growth,MNCl buys backdistribution rights,but the negotiationsare tougher thanexpected.

Because the distribu-tor has contracted tofurnish detailedn-iarket and financialperformance data,MNC2 can exploit itsglobal competitiveadvantages in thelocal market

MNCl eventually sets upa distribution subsidiaryin the country, but the for-mer distributor dumpsinventory into the mar-ket, making it difficultfor the corporation tosell profitably Businessis disrupted.

MNC2 establishes aregional marketing orga-nization, with a team inthe new country, andbuilds links among dis-tributors, thus leveragingsynergies and economiesacross the company andmaximizing global share.

relationships should serve the multinational's long-termgoals. "The most obvious distributor is not necessarilythe best partner for the long term," says a Loctite exec-utive. Like most companies expanding internationally,Loctite used to look for partners with the best "marketfit," meaning those already serving major customer pros-pects with similar product lines. But, says the executive,"The closeness ofthe market fit can be a liability as wellas an asset, because the distributors represent the mar-ket's status quo, and we are selling a replacement tech-nology and attempting to change the market."

The answer lies in the choice of partners. "We in-creasingly look for what we have come to call 'companyfit'-a partner with a culture and a strategy we feel com-fortable with, in terms ofthe investment they'll make,the training they'll give their people, and the supportthey'll ask from us," says the Loctite executive. "In manycases, this leads us to partners who have no experienceof our market. The first couple of times, this felt risky,but our success with some of these partnerships hasmade us bolder in choosing distributors."

In effect, this means bypassing the obvious choice - adistributor who has the right customers and can there-fore generate quick sales - in favor of a partner with agreater willingness to invest and an acceptance of anopen relationship that draws on the multinational's ex-perience in marketing its own products.

3. Treat the local distributors as long-term part-ners, not temporary market-entry vehicles. Struc-ture the relationships so that distributors become mar-keting partners willing to invest in long-term marketdevelopment. One traditional way of doing this is togrant national exclusivity to a distributor, although suchan agreement can become unproductive if confiicts ofinterest arise once entry is established. A more effectivesolution is to create an agreement with strong incen-tives for appropriate goals, such as customer acquisitionor new product sales. After all, the local distributor isthe de facto marketing arm of the multinational in itscountry.

Unfortunately, many companies actively signal to dis-tributors that their intentions are only for the short

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Seven Rules of International Distribution

term, drawing up contracts that allow them to buy backdistribution rights after a few years. Such a strategy doesavert one problem - it prevents a distributor from claim-ing that the multinational partner reneged on an earlierpromise-but it creates other problems. Even with sucha contract, a distributor might simply decide not to sellback the rights and might well be backed up in the localcourts. In many countries, regulations favor local busi-nesses over foreign vendors, so the multinational couldface a protracted struggle over distribution rights. Addi-tionally, under a short-term agreement, a local distribu-tor doesn't have much incentive to undertake long-termbusiness development. The Asia-Pacific manager of aconsumer goods company reported that several nationaldistributors, acting in the belief that sales revenues werethe key to the reacquisition price, had cut prices, boost-ing overall revenues but undermining the company'smarket positioning strategies.

4. Support market entry by committing money,managers, and proven marketing ideas. To retain stra-tegic control, multinationals must commit adequate cor-porate resources. This is especially true during marketentry, when corporations are least certain about theirprospects in new countries.

Traditionally, multinationals have demonstrated com-mitment by sending in technical and sales personnel oroffering training to distributor employees. Such supportis good, of course, but more experienced corporationsnow go further and do things earlier. In markets re-garded as strategically important, they've started to takeminority equity stakes in autonomous distribution com-panies. Although this increases exposure without achiev-ing control, it opens the door to cooperative marketingbased on shared information, thus increasing the ad-vantage and effectiveness of both the multinational andthe local partner.

Sometimes multinationals invest in distributors inways that don't lead to co-ownership but that demon-strate solid commitments to the relationships. A globalleader in hydraulics components, for example, now man-ufactures products according to the local technical stan-dards in a new market and bears some ofthe associatedinvestment costs. Formerly, the company would havesold products with incompatible specifications or paidextra to manufacture specialty items.

For many corporations, such commitments in un-charted markets with independently owned distributorsrepresent unacceptable risks. But most multinationals al-ready have effective controls for managing independentdistributors in home markets, and these might also besuccessful with international distributors. Additionally,experienced multinationals have discovered that earlycommitment of resources leads to better relationshipswith local distributors, thus enhancing business perfor-mance. One European telecom company, for example.

invested heavily in a service organization; the companywanted to shift the distributor's focus away from sellingequipment (a relatively easy task) and toward selling ser-vice (a more difficult one). The result has been highersales revenues and a more productive partnership withlocal distributors.

I find it curious that multinationals are reluctant tocommit resources at early stages. Once they've tested themarket, multinationals almost invariably increase theircommitments. My research uncovered only rare instancesof corporations withdrawing from countries they'd en-tered. So making a commitment early isn't really a newstrategy.

5. From the start, maintain control over marketingstrategy. An independent distributor should be allowedto adapt a multinational's strategy to local conditions.But multinationals should convene and lead planningsessions and exercise authority about which products tosell, how to position them, and budgeting. If corpora-tions provide solid leadership for marketing, they will bein a position to exploit the full potential of a global mar-keting network.

Multinationals committed to maintaining early con-trol over marketing strategy find that it's important tohave employees on-site. Some send a few employeesto work full-time at the local distributor's offices. Othersestablish country or regional managers who can keepa close watch on both distributor performance and cus-tomer needs.

"We used to give far too much autonomy to distrib-utors, thinking that they knew their markets," says onemanager. "But our value proposition is a tough one toexecute, and time and again we saw distributors cutprices to compensate for failing to target the right cus-tomers or to sufficiently train salespeople."

6. Make sure distributors provide you with de-tailed market and financial performance data. Amultinational's ability to exploit its competitive advan-tages in an emerging market depends heavily on thequality of information it obtains from the market. Inmany countries, the distribution organizations are theonly sources of such information. A contract with a dis-tributor must therefore require detailed market and fi-nancial performance data.

Not having these data can lead to serious problems. Aglobal leader in hydraulic components, for example, didnot know tbat its Hong Kong distributor was achievingalmost half its sales revenues within mainland China,nor that the products were being sold for about half oftheir Hong Kong price. When the multinational acquiredthe Hong Kong business and established a subsidiary, italso found itself saddled with a demand for drastic pricereductions in Hong Kong, an active parallel importingproblem, and discontented customers in China com-plaining about the lack of service support.

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Seven Rules o f I n t e r n a t i o n a l D i s t r i b u t i o n

The reaction to a request for market and financialdata reveals a lot about a distributor. Most distributors,of course, regard data like customer identification andprice levels as key sources of power in their relationshipswith suppliers. Several multinational executives said thatthe willingness of potential distributors to provide suchinformation was a prime indicator of whether successfulrelationships could be achieved.

7. Build links among national distributors at theearliest opportunity. Although a multinational's pri-mary focus after entering a new country is establishinga customer base there, the company should create linksamong its national distributors as soon as possible. Thelinks may take the form of a regional corporate office oran independent network such as a distributor council.The transfer of ideas within local markets can improveperformance and result in greater consistency in the ex-ecution of international strategies.

One executive of a sportswear company explainedthat although distributor councils originated for defen-sive reasons-to minimize the risks of diversion or par-allel importing-other benefits have accrued: "Once thedistributors started talking, they also started planning.

We soon had regional initiatives for new products, withsuccessful design based on the local market, and thescale required to make them profitable. There was alsoa noticeable decrease in the variation between productsmanufactured by our national licensees."

Multinationals need to do a better job of selecting andworking with local distributors. In particular, they mustunderstand that distributors are implementers of mar-keting strategy, rather than marketing departments inthe country-market. The result will be better working re-lationships, fewer plateaus and crises, and more consis-tent growth in market share and sales revenues. Oncecorporations understand that they can control their in-ternational operations through better relationship struc-tures rather than simply through ownership, they mightalso find longer-term roles for local distributors within aregionalized approach to global strategy. ^

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