Identifying the right channels in new markets

When a company enters an international market, it has to make critical market-entry decisions – in particular, decisions about what sales channels to use. Frequently, the decision skews towards the familiar, i.e. the channels used in the domestic market such as a dedicated sales force or a distributor model. This is understandable when one considers the effort that was involved in mastering the organization and nuances of the domestic channels.

McNaughton and Bell (2000) point out that this skewing towards the familiar could also be attributable to administrative heritage or strategic momentum; in other words, how long were the domestic channels in use and what is the company’s normal tendency towards innovation or embracing change.

McNaughton et al. also determined that there are three main factors involved when a company is deciding whether to switch from a higher-control channel (e.g. dedicated sales force) to a lower-control channel (e.g. distributor):

  • Asset specificity – this factor becomes critical if either party must invest in physical or human assets, i.e. office space or sales staff. For example, if an agent is being asked to invest in additional staff or expanded offices, that agent will likely ask for substantial concessions in terms of price or control in order to close the deal.
  • Environmental uncertainty – this factor hinges on the volatility and diversity of the new market. A company is more likely to cede control to a local partner who understand the environment better rather than invest the time and energy in understanding the local market.
  • Channel volume – this factor deals with how a company will try to minimize the sum of production and transaction costs. If there are economies of scale in using the same channels, e.g. simply expanding a distributor network, most companies will lean towards the most cost-effective option.

McNaughton et al. caution against letting the above factors rule the decision-making process. Instead, these factors should be evaluated as potential emotional barriers to making the best decision for the desired market; in fact, the decision process should always try to include deliberate counter-options to the factors above by way of balance.

References:

McNaughton, R., Bell, J. (2000). “Channel switching between domestic and foreign markets.” Journal of International Marketing. 9 (1) pp. 24-39.

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