Employing distribution or direct operations does not abrogate your need to understand local markets

Tuesday, August 1, 2006 9:53
Posted in category The Big Picture

Having managed foreign service and distribution operations in Asia and Europe, Rich’s status report in The Changing Nature of Distribution in China rings true. My concern is that too many readers will not grasp its operational meaning that, at root core, distribution is an exchange of footprint for control, and that whether the choice is direct or distribution, the principal must have a working knowledge – all the way back to its headquarters and development center – of the local market and its supply and distribution chain.

In distribution operations it’s important to remember that the principal surrenders control of the client/end-user and the sales channel to the distributor in exchange for increased “footprint” at a lesser cost than going direct. The principal is generally at the mercy of the distributor in many ways — in local investment strategies, market demands and rollouts, et al. The distributor operates in its interests and not in the interests of the principal.

Many principals do not attempt to find out how important their products are to the distributor and thus what leverage they may exert on any given issue. Conversely, principals often go direct without the commitment, knowledge and financial reserves to stay the course. The key is not in striking the contract but in selecting the best business partner for your current and future needs. Then comes the agreement. If a poor distributor is chosen, the principal will have turbulence in their distribution channel for six to nine months even if they can terminate, or arbitrate the closure of, the agreement (relatively) cleanly.

Local buyers want (expect) to have local service/distribution for an offshore product. Local distribution can defer that fear of an offshore product — becoming a means to overcome FUD (fear, uncertainty and doubt) in the mind of the buyer and differentiating the principal’s product (although the offshore product will still have to produce significantly greater returns than locally available products to tempt the buyer to purchase). As Newton “stood on the shoulders of giants” so do principals stand on the size, reputation and proximity of a local distributor. Foreign buyers too often see US firms and/or their management teams as transient and lacking the understanding to do business locally unless they have a local distributor. The principal co-opts the presence and security of the local distributor as their own.

The United States market had so dominated the purchase of technology products in the Postwar period to the point that a dangerous myopia had overcome too many US management teams. The management, sales, marketing, and development arms of most US firms invisibly reflect this myopia where “different” is assumed to be wrong rather than merely different and in need of appropriate service. Even the postwar classic (and now often inaccurate) 60 — 30 — 10 percentage breakdown between the US, Europe and “All other” (then primarily Japan) has not done this skew justice as American managers still have a residue of seeing offshore regions as an amalgam of alien markets asking for “the wrong thing in the wrong order at the wrong time.” When US managers do think about foreign markets, they tend to see them as smaller mirrors of the US market, having the same technology horizon, needing products and services of the same content, buying them at the same time, purchasing them for the same reasons, and responding to the same marketing themes and sales vehicles. Firms with dedicated headquarters marketing groups generally fare no better as these groups mirror the marketing mindset of the Americas where they reside.

If the US/EU firm does get correct guidance on offshore markets but does not educate its internal organization, their staff will hear the words without understanding the true meaning so as to operate effectively. A simple example is the risk averseness of Central Europeans compared to the US. Whereas the US sees, say, Germany as conservative, possibly risk averse, the Germans see the US as risk taking, and often foolhardy. The different risk horizons are rarely verbalized and each projects its assumptions upon the other and is then baffled at the odd judgment of their partner. Transpose the difference to, say, Japan or China and disaster awaits.

Left unchecked, and the US parent uneducated, the firm continues to be baffled as to why its products do not sell, continues to have “unexpected” regional revenue shortfalls, and continues to scapegoat the local country managers or distributors. The result is a stunning loss in direct and indirect opportunity that is rarely recoverable before more intelligent competitors absorb market share.

In reality foreign markets vary widely among themselves and in comparison to the US. Each foreign market has its own technology horizon, needs unique, tailored content in its products and services, buys those products in its own cycle, purchases them for different reasons, and demands its own marketing themes and sales vehicles. Foreign markets are not smaller versions of the US market. The US firm that understands this and drives the awareness of those differences into each segment of its operations is capable of becoming a truly global firm with a palette of products and services avidly sought by the potential buyers in each region it does business.

Whether you commence with distribution, later transitioning to direct, or go direct from the onset, you must keep these first principles in mind in order to have a chance at success.

Gordon Housworth
Intellectual Capital Group LLC

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One Response to “Employing distribution or direct operations does not abrogate your need to understand local markets”

  1. All Roads Lead To China » A process of foreign market definition and product delivery says:

    August 3rd, 2006 at 4:47 pm

    […] China Strategic Development Partners « Employing distribution or direct operations does not abrogate your need to understand local markets A process of foreign market definition and product delivery […]