Question

Harvard professor David Arnold offers seven specific guidelines to help companies entering emerging markets prevent/limit their risk and financial exposure. What are they? Why are they important? (Global Marketing)

Answer 1

Answer: Harvard professor David Arnold offers seven specific guidelines to help companies entering emerging markets prevent/limit their risk and financial exposure.

Harvard professor David Arnold offers seven specific guidelines to help prevent such problems from arising.

• Select distributors. Don’t let them select you. A company may link up with a distributor by default after being approached by representatives at a trade fair. Such eager candidates may already be serving a company’s competitors. Their objective may be to maintain control over the product category in a given market. A proactive market entrant can identify potential distributors by requesting a list from the U.S. Department of Commerce or its equivalent in other countries. The local chamber of commerce or trade association in a country can provide similar information.
• Look for distributors capable of developing markets, rather than those with a few good customer contacts. A distributor with good contacts may appear to be the “obvious” choice in terms of generating quick sales and revenues. However, a better choice is often a partner willing both to make the investment necessary to achieve success and draw upon the marketing experience of the global company. Such a partner may have no prior experience with a particular product category.
• Treat local distributors as long-term partners, not temporary market-entry vehicles. A contractual agreement that provides strong financial incentives for customer acquisition, new product sales, or other forms of business development is a signal to the distributor that the market entrant is taking a long-term perspective. Such development can be done with the input of managers from the global company.
• Support market entry by committing money, managers, and proven marketing ideas. In addition to providing sales personnel and technical support, management should consider demonstrating its commitment early on by investing in a minority equity stake in an independent distributor. The risks associated with such investment should be no greater than risks associated with independent distribution systems in the manufacturer’s home country. The earlier such a commitment is made, the better the relationship that is likely to develop.
• From the start, maintain control over marketing strategy. To exploit the full potential of global marketing channels, the manufacturer should provide solid leadership for marketing in terms of which products the distributor should sell and how to position them. Again, it is necessary to have employees on site or to have country or regional managers monitor the distributor’s performance. As one manager noted, “We used to give far too much autonomy to distributors, thinking that they knew their markets. But our value proposition is a tough one to execute, and time and again we saw distributors cut prices to compensate for failing to target the right customers or to sufficiently train salespeople.”
• Make sure distributors provide you with detailed market and financial performance data. Distributor organizations are often a company’s best source— maybe the only source—of market information. The contract between a manufacturer and distributor should include specific language to the effect that local market information and financial data will be transferred back to the manufacturer. One sign that a successful manufacturer-distributor relationship can be established is the latter’s willingness to provide such information.
• Build links among national distributors at the earliest opportunity. A manufacturer should attempt to establish links between its networks of national distributors. This can be accomplished by setting up a regional corporate office or by establishing a distributor council. At any point in time, a company may have some excellent agents and distributors, others that are satisfactory, and a third group that is unsatisfactory. By creating opportunities for distributors to communicate, ideas for new product designs based on individual-market results can be leveraged, and overall distributor performance can be improved.

A global company expanding across national boundaries must utilize existing distribution channels or build its own. Channel obstacles are often encountered when a company enters a competitive market where brands and supply relationships are already established. If management chooses direct involvement, the company establishes its own sales force or operates its own retail stores.

Companies entering emerging markets for the first time must exercise particular care in choosing a channel intermediary. Typically, a local distributor is required because the market entrant lacks knowledge of local business practices and needs a partner with links to potential customers. In addition, newcomers to a particular market generally want to limit their risk and financial exposure. Although initial results may be satisfactory, with time the local distributor may come to be perceived as performing poorly. This is when managers from the global company often intervene and attempt to take control from the local distributor.

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