International Business Article – Is Getting A Distributor Enough In International Business?

Here is a case for distribution:

A U.S.-based software firm was attempting to enter Asian markets. It thought the quickest way to success was to find accomplished distributors who would carry its software. U.S. firms experience an 85 percent failure rate selling to Asia, so this firm wasn’t willing to undertake heavy investments there. After spending months finding a Singaporean distributor, the firm thought it had gained a foothold in Asia. All the signs were good: Singapore is a technologically advanced, English-speaking market. While its population is only about 3 million, it can be a springboard to the rest of Asia. This distributor was selected because it had many major accounts, and experience selling them foreign software.

The firm learned the Singaporean legal process mirrored the United States’ in terms of due diligence, negotiation and contractual obligations.

A year after this distribution partnership was formed, there were no sales. The U.S. firm thought the distributor was lazy. Additionally, the firm thought that since the distributor wasn’t keeping its end of the bargain, its partner was unethical.

To start to understand this quagmire, let’s see what the expectations were – and what went wrong.

The reality of a distributor not selling aggressively isn’t unique to Singapore. This complaint is commonplace throughout Asia and the rest of the world. It’s important to understand what distributors do and what they expect.

Think of a distributor as a convenience store. The store may carry many items, but doesn’t seem to vigorously sell or market most of them. The store leaves the marketing up to its suppliers. Thus, Coca-Cola will run promotions in convenience stores more often than the store itself will push the soft drink.

The same is true for distributors. It’s best to think of them as aiding in logistics more than marketing. There are exceptions to this rule, but usually distributors are driven by their clients.

Once demand for a firm’s product is stimulated, good distributors can work well with qualifying prospects, financing, delivery, merchandising and collection. Generally, they leave the marketing to their vendors. This can often be a huge mistake in International Business.

Distributors often have two main questions when they meet with suppliers:

1) What will you do to stimulate demand (advertising, public relations, direct sales)?

2) What is my cut?

Researching the market, the promotional tools available and answering these questions satisfactorily will give the partnership the right start. In the United States, a software distributor will have a sales force, but the sellers will have a selection of products to offer. In software, we often refer to these parties as VARs (value added resellers).

The VAR will be interested in how its suppliers will aid in sales.

Will they advertise?

Will they attend sales meetings with them?

Will they train its sales force?

Will they supply relevant, professional marketing materials?

Will key executives be available when needed?

Have they built a strong brand, and are they protecting the brand?

Are they providing any marketing dollars or in-kind contributions (such as company vehicles, cell phones, offices and call center services)?

Obviously, a distribution strategy needs to be well thought out. Add a foreign country like Singapore to the mix, and it gets even more complicated.

In examining our example firm’s assumptions, it’s wrong to suggest the distributor is “lazy” when much of the above criteria aren’t met.

“Unethical” is a term that should never be used in international business. Ethics are a suit of clothes, and your ethics don’t equal my ethics, which don’t equal Singaporean ethics. The distributor may think the U.S. firm is “unethical” in that it expects to immediately enter a new market and displace longstanding vendors.

U.S. firms fail in Asia often because they haven’t invested enough. Investment is necessary in, for example, research, market strategy, training of key personnel and distribution support.

Singapore offers several advantages to U.S. firms wishing to lose their innocence in Asia, but in reality, Singapore is very Western. This English-speaking modern market is relatively small, and engages in customs and protocols quite different than those of Japan or even China.

Much of U.S. firms’ discussions with the Singaporeans were of a legal nature: minimum sales requirements, margins, product rights, etc. Yet discussions with distributors should be largely focused on client support and marketing. Talking about legal matters was of little help.

While Singapore’s technological advantage eases business transactions, it tends to also narrow the United States’ technological lead. Singaporean technology works well. The U.S. firm’s added value would be greater in a different Asian market.

Last, many firms throughout the world feel that “once distribution is won, the deal is done.” In addition to many of the support techniques, it’s vital to develop a personal relationship with any Asian business partner. Frequent visits to the distributor and its key clients are necessary.

A solid Asian distribution strategy should encompass continuous support, both on business and personal fronts.

When was the last time you took your distributor to dinner?