International Distribution Channels: Basic Features and Pitfalls

The distribution of products or services through international channels, agents, or other types of representatives is perhaps the most traditional method of expanding a business in a new foreign market. In this introductory post, we mention just a few of the most attractive features as well as common pitfalls associated with international distribution channels.

Perhaps the most attractive features of international distribution are its relatively low cost combined with the flexibility the strategy provides for manufacturers/exporters.

In terms of cost, distribution may be achieved simply by signing an agreement that authorizes the resale and/or other type of distribution of a product or service. While the manufacturer/exporter must arrange for the product to reach the distributor, it may rely on contract terms that require its channel partner to perform many of the activities -- and incur the related costs -- associated with getting its product to end customers, including such key tasks as storage and inventory tracking, retail management, and end-user pricing, just to name a few. In some circumstances, a distributor may even manage such arrangements entirely from its offshore home, eliminating the costs of a local office and workforces associated with other market entry strategies such as **greenfielding**, **M&A**, and **ISVs** (for a broader discussion of these strategies, which may be combined with distribution models to gain market share after entry, see here.

In terms of flexibility, the manufacturer/exporter can design its distribution arrangements to establish different types of channels that serve specific market segments and/or focus on particular products. If well designed and managed, a business can eventually develop a team of hand- picked partners -- much like position players on a sports team -- each performing particular roles to maximize market coverage and results but, again, without many of the costs of creating and housing such a team in-house. Finally, by limiting the duration and other terms of distribution arrangements, a manufacturer/exporter can, in theory at least, terminate channels that may not be producing results and perhaps activate new ones in their place, without incurring costs associated with layoffs, retraining, closing offices, etc.

But while the promise of low costs and flexibility are what typically attract businesses to try distribution models, these goals often prove elusive. Here are just a few of the most common mistakes we see companies make when seeking growth through distribution:

• Failing to Actively Study and Recruit Partners

Companies seeking new markets are often too eager to test distribution and lose sight of the importance of properly studying and selecting from a range of distributors that operate in a market. The simple reality is that not all channel companies are the same. Some don't have the experience to properly sell a new product line while others may have plenty of experience but lack the drive to position a specific product over others that they carry. Companies seeking new channels are well advised to select distributors only after extensive study and vetting of a range of possible candidates. A commitment to a selective and competitive recruitment process is the only tried and true method to find channels that are properly positioned and driven to push a company's products and achieve results.

• Failing to create an objective programs

Many companies also fall into the bad habit of creating channel relationships "along the way" without first envisioning an ideal team or network of partners to cover their selected market. The result is likely to be a patchwork of customized relationships that require significant amount of management time just to understand the historical promises and arrangements that were made over time. A much better approach is to develop a set of pre-established, written ground rules that: (i) explain the different types of channel categories that may be required or attained, (ii) establish rules for pricing discounts and other perks available to the different types of channels, and (iii) clarify grounds for exclusion or termination of a relationship. In our experience, the result of such pre-planning, if well designed, is a much more orderly, easy to manage, and productive set of channel relationships.

• Failing to maintain active channel management

Many times even well designed and successful programs wither over time, invariably due to a failure to maintain active management. When distribution models work well, they tend to develop a flow that may seem to be perpetual. Orders keep coming in, payments get made, and everybody seems to win. But there are no guarantees in distribution. Just as new products and players transform markets over time, channel partners and programs need to be reevaluated and changed to keep up with the times. Failure to do so, may spell doom for distribution models.

• Not getting experienced set-up advice

Lastly, companies interested in establishing international distribution models should seek out advisors to properly set up their channels. These advisors may perform a variety of services including studying a market to identify and map distributors by specialization and/or market coverage, designing channel programs, or setting up contract terms (distribution agreements are especially challenging in certain markets in Latin America which makes good and experience counsel must). While good advisory services come with a cost, success in distribution will typically make such costs well worth it.

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Andres Snaider is a founding partner of Nextant, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. With a degree in law and experience working as an international attorney and businessman, Andres has advised clients on a range of commercial matters and investments in almost every country in the Americas, including the US, Mexico, Colombia, Brazil, Ecuador, Argentina, Chile, and Canada, just to name a few. He is a graduate of the Harvard Law School and currently lives and works in Boulder, Colorado.

Email Andres at asnaider@nextant.com

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Nextant has extensive experience in assisting leading clients through its Market Expansion and Business Optimization services. For more information on how Nextant can assist your company in socializing a market entry and initiating sales, please visit our website at http://www.nextant.com

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