In this section, case findings about the three sales subsidiaries will be presented first and followed by a discussion.
Case Findings
The sales subsidiary of Company A in the Netherlands
Roles. Company A started international operations in 1987 and set up sales subsidiaries in Europe in the 1990s. When it set up the sales subsidiary in the Netherlands in 1998, it already had subsidiaries in Germany, Hungary, the United Kingdom, France and Italy. In 2001, Company A converted the sales subsidiary in the Netherlands into European headquarters which was in charge of the following activities: (1) managing direct accounts through the direct sales forces in each sales subsidiary; (2) coordinating and controlling channel development activities in each sales subsidiary; and (3) providing technical and logistics services throughout the region.
Channel structure. The distribution structures in Europe for industrial personal computers vary among
countries. In general, wholesalers provide integrated services, one-stop shopping experience, and financial support for small retailers (dealers), form strategic alliances with producers and assist brand development.
Furthermore, SIs focus on providing professional knowledge regarding vertical markets, while wholesalers, dealers and retailers focus on sales, product maintenance, regional marketing activities, and after-sale services. Company A uses five types of distribution channels in Europe (Figure 2): (1) Wholesalers. All products are sold under the brand of Company A and two limited-functions channels are: box moving channels which ships products rather than provide any integrated services; and dealers or retailers which are served by wholesalers due to their small scale. (2) System integrators (SIs). They serve end customers by combining their knowledge of vertical markets and integrating Company A’s products with other producers’
products. They are considered as a major channel for Company A. (3) Valued Added Resellers (VARs).They add value to Company A’s products by adding some features or functions and typically market the products with Company A’s brand. Sometimes they become original design manufacturer (ODM) clients. (4) Original Equipment Manufacturer (OEM)/ ODM clients. They require Company A to provide customized products and services directly and the sales volume tends to be larger. (5) End-users.
To increase market coverage, Company A adopts an intensive distribution strategy in Europe.
It relies on its own sales force to engage in the following activities to build the distributing channel: (1) cooperating directly with dealers; (2) integrating with existing distributors; and (3) using e-commerce to maintain and connect the channels beyond the reach of current channel members. In addition, each product line’s channel structure differs for Company A. For example, though wholesalers account for the largest share of products sold for the firm as a group, for the
SBU of industrial automation products, the distribution of sales are 70 % from SIs, 15 % from VARs, and 15
% from wholesales, dealers and retailers.
Channel management. A wide-coverage distribution strategy implies that the competition among channel members will become more intense and some conflict will be generated among distributors. The firm encounters several sources of conflict:
(1) Overlapping of business activities generates three types of conflicts: (a) conflict among European distributors, (b) conflict between the direct sales force and channels, and (c) conflict between distributors and parallel imports (i.e., gray markets).
(2) Differences in perception between the firm and distributors
For Company A, a little competition among distributors is beneficial because it stimulates distributors to work harder. However for distributors, they prefer to reap the sales in their own territories and hope Company A to give them exclusiveness. To avoid channel conflict,
Company A adopted some actions. Examples are: if a SI gives an order to its subsidiary, it will assign a distributor to deliver the products (i.e., fulfillment); and if a client becomes a direct account (i.e., ordering directly from the subsidiary, not a distributor), the firm will book the
volume as the shipment of a particular distributor for two years so that the distributor can enjoy the incentives associated with sales volume.
Over the years, Company A has developed several incentives to increase distributors’ loyalty. These incentives include: price incentives such as discounts and billback & count-recount;
promotional incentives such as annual marketing agreements, display allowances, and co-op advertising &
co-marketing programs; motivation incentives such as contests and special promotional incentive factory funds. To ease the concern of distributor, Company A has a price protection policy, i.e., if the price of a product has dropped significantly, the firm will compensate distributors either by discounting the account payable from the distributors or giving some products for free. In addition to offer sales supports (such as offerings sales training and assistance) to distributors, sometimes Company A will assign a salesperson to work along the personnel of a distributor.
The sales subsidiary of Company B in the United States
Roles. Company B set up the sales subsidiary in 2000 in the US to aggressively promote its brand in North America and Latin America. Currently the subsidiary has five units, including sales and marketing, product
management, finance and administration, customer service and technical support, and warehousing and logistics. The headquarters in Taiwan is responsible for product development and manufacturing. The subsidiary is evaluated by the headquarters by total sales, sales of each product line, profit margin, and market share. Some non-financial performance indicators (e.g., maintaining a healthy business model) are also adopted by the headquarters.
Channel structure. Due to the nature of the product, few end-users purchase computer chassis and
components for self-assembly and these users typical buy final products and solutions from SIs and VARs.
Because computer chassis is a standardized product, has longer product life cycle, and
less involvement of buyers is needed, Company B feels that it is important to build strong ties with distributors and has decided to adopt a selective distribution strategy. Figure 3 illustrates the channel structure of Company B in North America which includes the following: (1) less than 10 national distributors with sales over US$ 1 billion; (2) less than 5 regional distributors with smaller sales and focusing on niche markets; (3) SIs/VARs with sales ranging from US$ 50 to 250 million; and (4) OEMs/ODMs or EMS (electronic manufacture services) which need customization and sales usually is over US$250 million.
Company B feels that to reduce moral hazard and information searching costs for end-users, working with larger distributors in B2B business is critical. This will help a manufacturer to build its reputation and brand recognition to end-users (Chiou, 2000). Moreover, with the assistance from larger distributors, buyers’ cost of information search is reduced. Large distributors offer other advantages. First, one characteristic of the distribution channels in North America is so called “the larger getting larger” and the growth of smaller distributors is constrained. Second, the larger distributors in the US usually have operations in Canada and Latin America which help Company B to extend its market coverage to Canada, Mexico and Latin America.
And finally, Company B can gain knowledge regarding distribution management and supplier relationship from these large distributors.
Channel management. When developing distribution channel members, Company B has the “quantity restriction policy” and “vital few policy.” The quantity restriction policy restricts the number of distributors it can work with in a particular area and the vital few policy encourages its distributors to gain more businesses from existing customers. However, the relatively smaller size
of Company B makes it challenging to persuade larger distributors to work with it. Company B is able to deliberately collaborate with a few distributors for three reasons. First, there are few suppliers of chassis with industrial -grade quality. Second, Company B has some advantage in designing and manufacturing chassis. And third, Company B fulfills its promises to distributors, especially in channel integrity. Even with these advantages, it still takes lots of effort to form alliances with large distributors and sometimes it takes 2 years to draw a contract.
Company B selects distributors sharing similar goals. When a distributor is selected by Company B, it will request the distributor to provide a simplified version of marketing plan detailing how it will promote and sell products. In return, Company B will supply the information about its product lines, unique selling proposition, marketing plans, pricing strategy, current channel structure, target markets, credit policies, inventory policies, promotion programs, advertising schedules, and potential returns to the distributor involved. Company B does not offer special discounts to a particular distributor and all distributors enjoy the same incentive programs as indicated below: (1) volume discount: this incentive is related to the quantity ordered and to avoid distributors taking advantage of the incentive by only ordering more from Company B (so-called sales-out), not really selling to end-users (so-called sales-through), Company B enforces some terms and conditions, such as certain orders are non-cancelable and non-returnable; (2) project registration programs: for large projects, a distributor will receive a special discount if it can spec-in Company B’s products into the solution to end-users; (3) spiffs: extra commission is provided for selling a particular product; (4) volume incentive rebates (VIRs): if a distributor can achieve monthly or annual sales targets (either total target or target for a product line), a reward will be given to the distributor; and (5) advertising co-op and market development funds (MDFs): Company B will share part of the advertising and marketing
expenses of a distributor.
The sales subsidiary faces two types of conflicts. The first is distributors fighting for the same end-user and the second is channels with different nature penetrating into another’s territory. To solve the first problem in advance, Company B asks a distributor to supply certain information about a potential project and gives certain protection to the distributor. Taking the policy of first-come- first-serve, the first distributor
registering a project enjoys the exclusiveness for certain period of time. However, if it does not register with Company B and is not able to conclude the deal during the protected period of time, other distributors can pursue the deal. In addition, the following two policies adopted by Company B in dealing with channel members are also helpful in preventing the conflict with distributors: (1) channel integrity: it will never sell products directly to dealers and end- users; and it intends to build a long-term partnership with channels and ensure all participants earning reasonable profits; and (2) a healthy business model: it abides by the rule of channel integrity as it promised and will not extend payment terms to distributors, disturb price structure of its products, force distributors to hold unnecessary inventory, and maintain channel order.
The sales subsidiary of Company C in the United States
Roles. Company C set up its US sales subsidiary in 2008. The performance of the subsidiary has been satisfactory: the sales reached NT$15 million in 2011 and is expected to grow by 30%
in 2012. The subsidiary is responsible for the marketing and delivery of products and providing technical services to clients. The headquarters in Taipei would assist if the subsidiary is not able to handle alone. The subsidiary has constant interaction with the headquarters to improve the quality and design of its products offered in North America.
Channel structure. Due to its small size and relatively new to the market, Company C selects three types of distributors to reach its targets, from the most important to the least: (1) national distributors, (2) regional distributors, and (3) independent distributors. National distributors generate about 40% of the sales in the US and the firm partners with less than 10 distributors. The firm has about 10 regional distributors with each
one covering several states; more than 20 independent distributors, which usually are small, serve smaller geographic area. Independent distributors provide better services than both national and regional distributors as they can contact local customers frequently. Company C also hires independent sales representatives (ISRs) to negotiate with potential local clients and to develop new channels. By using their personal
networks, ISRs facilitate Company C to get hold of new business opportunities. The length of the channel is short because clients can deal with national, regional or independent distributors directly. The channel density currently is low. As a new entrant, Company C believes that it would be unwise to spread its resources too thin and should work with limited number of distributors.
Channel management. Company C recognizes the importance of building long-term partnership with its distributors; therefore it always tries to abide by its promises. It only sells products through distributors.
Moreover, Company C has the policy of following channel integrity. It may get some information about end-users (or clients) but still relies on distributors to fulfill the orders from these clients. To motivate distributors, Company C provides thre e kinds of incentives: (1) quantity incentives--when sales reaches certain targets, the firm gives rewards to distributors; (2) marketing support fund--the firm would help distributors for all kinds of promotions; and (3) special programs--sometimes the firm assists distributors to conduct promotional activities for certain products. The only channel conflict among distributors is that, instead of ordering from independent distributors, ISRs may order products from national or regional distributors.
DISCUSSION
Channel Structure. From the case summary in Table 2, we can reach the following conclusions. First, in B2B business, sales subsidiaries tend to market products with shorter channel length (typically two levels). In the study, all three firms adopted such strategy. Though a selective channel strategy is more appropriate in the B2B business context, but if a firm’s objective is to increase market coverage, then selecting a high intensity channel structure seems more preferable as illustrated by Company A. Most industries in DCs regard
multiple channels as a must, not a choice. Multiple channels enable customers to purchase products at their preferred channels, which in turn expands firms’ market coverage and increases sales (Sertain & Kabadayi, 2011). In addition, the infrastructure of distribution and variety of capable distributors in DCs make it possible for LDCMNCs to select suitable distributors in compliance with their strategies and internal capabilities. We have found that all three firms adopt multiple sales channel strategy in DCs. For Company A, its channel included direct sales, distributors, dealers, and SIs or VARs in order to serve different needs of their customers. Moreover, because channels of distribution are well developed in DCs, the challenge of sales subsidiaries of foreign firms is to attract their attention, not to rebuild the channel structure. Therefore, we propose:
Proposition 1: When marketing hi-tech industrial goods in developed countries, firms from developing countries tend to use multiple channels.
Offering services and supports to channels would be the next step after manufacturers have signed up channels. In high-tech industries, characterized by shorter product life cycle, indispensability of an
associated infrastructure, lack of well-established industry standards, and product functionality uncertainty (Sahadev & Jayachandran, 2004), which imply higher uncertainties for distributors. Consequently,
manufactures prefer to adopt dual channel system to ensure competition between distributors and to provide a safeguard against opportunism. However, in the study, we found that only Company A used dual channel system. There are two plausible reasons. First, the cost of setting up integrated distribution is high. And second, because dual channel distribution is easily to trigger conflicts between integrated distributors and independent distributors, only the leading companies with high producer power have been able to manage this channel strategy successfully (Gabrielsson, Kirpalani, & Luostarinen, 2002). Company A is one of the leading global industrial computer manufacturers and therefore it has more bargaining power than its distributors. However, Companies B and C, due to their small scale of operations and lower revenues from their distributors, they have harder time to resolve conflicts between integrated and independent distributors.
For their relatively weaker bargaining power, Companies B and C prefer to adopt multiple independent
channel system. Furthermore, in upstream FDI, LDCMNCs encounter numerous problems such as liability of foreignness (Hymer, 1976) and liability of country of origin (Chang et al., 2009), which will increase the difficulty of managing the integrated distribution. Therefore, we propose the following:
Proposition2: When marketing hi-tech industrial goods in developed countries, dual channel system is adopted when LDCMNCs have stronger bargaining power than distributors; on the contrary, multiple independent channel system is adopted when LDCMNCs have less bargaining power than distributors.
LCDMNCs encounter more of liability of foreignness, liability of country of origin and liability of newness in DCs. They can advertise to promote their brand awareness (i.e., a pull strategy) or rely on distributors to promote their products (i.e., a push strategy). For Companies B and C, due to limited resources, seeking support of channel members was unavoidable. To decrease customers’ information searching costs and moral hazard, cooperating with national distributors was considered as the priority for Companies B and Company C (Chiou, 2010). Furthermore, manufacturers can learn local knowledge and regulations from national distributors which would lead to better channel system and management later on. Therefore, we propose:
Proposition 2: When a selective channel strategy is adopted, a LDCMNC prefers to work with large national distributors (i.e., distributors with good reputation) to reduce the transaction costs to clients.
As high-tech industries usually deal with complex products, firms are more likely to use high touch channels, such as VARs. We have found that all three companies cooperate more with high touch channels and work less with low touch channels (Friedman & Furey, 1999). Therefore, we propose:
Proposition 3: When marketing hi-tech industrial goods in developed countries, LDCMNCs tend to work more with high touch channels than with low touch channels.
Channel management. As shown in Table2, Company A adopted a short-wide-high concentrated channel structure and a dual channel system; therefore conflicts between the firm and its distributors were expected.
On the other hand, both Companies B and C applied short wide-low-concentrated channel structure;
therefore conflicts and competitions between the firm and its distributors were lower. According to Margrath and Hardy (1989), when firms are in the high conflict zone, to prevent conflicts, firms should take
appropriate measures. For instance, Company A used vertical marketing to decrease conflicts between itself and distributors and both Companies B and C cooperated with national and regional distributors to reach higher market coverage and to prevent conflicts. In addition, Company B restricted the total number of distributors and adopted a project registration program. Therefore, we propose:
Proposition 4: In developed countries, LDCMNCs experience more channel conflicts when adopting dual channel system than adopting independent multiple channel system.
Proposition 5: In developed countries, LDCMNCs tend to make more effort on designing channel conflict prevention mechanisms than designing channel conflict resolution mechanism.
Except Company A, both Companies B and C enthusiastically developed long-term relationship with distributors. Company B emphasized a healthy and integrated business model; therefore it offered same incentives to all distributors However, Company A tended to maintain an exchange relationship with its distributors because of stronger brand strength enabled it to negotiate with distributors directly. Both Companies B and C had weaker brand strength, they had difficulty in developing market demand and depended more on distributors to promote their products. Therefore, Companies B and C were more willing to build relationship with distributors than Company A. Therefore, we propose:
Proposition 6: In developed countries, LDCMNCs with less known brand names emphasize more on building relationships with distributors.
Efforts to maintain a healthy business model and follow channel integrity enable a sales subsidiary to build long-term partnership with distributors. The experience of Companies B and C show that, even though a firm was small and had limited product lines, it is able to cultivate strong ties with large distributors by
taking certain actions. Therefore, we propose:
Proposition 7: Channel integrity is helpful to strengthen the ties between distributors in a developed country and LDCMNCs.
Financial incentives, which are directly related to performance of distributors, were used more frequently to motivate distributors; sales support incentives and managerial support incentives,
which are indirectly related to performance, were less in usage by LDCMNCs. Following Gilliand’s (2003) classification, by the order of preference of incentives adopted by the sales subsidiaries of Taiwanese firms
which are indirectly related to performance, were less in usage by LDCMNCs. Following Gilliand’s (2003) classification, by the order of preference of incentives adopted by the sales subsidiaries of Taiwanese firms