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Selecting Foreign Distributors An Expert Systems Approach S. Tamer Cavusgil Poh-Lin Yeoh Michel Mitri Distributor selection is one of the most important choices a manufacturer will make in exporting. Foreign distributors or agents carry on the responsibility of marketing the manufacturer's product and servicing customers in the local market. The characteristics that contribute to successful distributors are numerous, making it imperative for manufacturers to employ a systematic approach to selection. This article introduces a computer- aided decision support tool for qualifying potential distributors. The tool, developed as an expert system, provides the user with an interactive algorithm for arriving at reasonable conclusions. In-depth interviews with experienced international business executives led to the development of a comprehensive set of selection criteria. These criteria and related insights form the basis of discussion in the article.
Address correspondence to S. Tamer Cavusgil, Executive Director, International Business Center, Michigan State University, 7 Eppley Center, East Lansing, MI 48824-1121.
Industrial Marketing Management 24, 297-304 (1995) © Elsevier Science Inc., 1995 655 Avenue of the Americas, New York, NY 10010
After experiencing some mediocre sales from its distributor in a key foreign market, a U.S. manufacturer conducts an investigation as to possible causes. To its surprise and disappointment, the manufacturer finds that its distributor is also representing another foreign manufacturer with competing products. A manufacturer of hospital equipment feels that it is not getting its share of sales in a rapidly industrializing developing country. Discussions with potential customers suggest that the local distributor appointed by the manufacturer suffers from a poor reputation and little political clout. While generating satisfactory sales in the principal urban city in its territory, a foreign distributor fails to capitalize on the market potential of the rest of the nation. A close examination reveals that the distributor has no access to distribution channels outside of the principal city and is not willing to invest in additional sales personnel and physical facilities. Impressed by the enthusiasm and charisma of its owner/ president, a U.S. manufacturer signs a foreign company as
0019-8501/95/$9.50 0019-8501(95)00013-Z
Why expert systems can be helpful in international business decisons. its distributor. The relationship is terminateci 3 years later-at a significant cost to the manufacturer. Apparently, despite all the good intentions on the part of the distributor's principal, there was simply no qualified sales and technical team to carry on the responsibilities or the financial resources to expand the business. These and other real-world experiences are typical of the problems that may arise with foreign distributors or agents. The majority of U.S. manufacturers rely upon local, independent agents and distributors when they tap export opportunities in foreign markets. They delegate important business functions to them: physical distribution, sales, customer service, maintenance and warranty, promotion, and so on. When foreign distributors are chosen hastily without a thorough examination of relevant qualifications, manufacturers are likely to be disappointed with their performance. In the worst-case scenario, the U.S. manufacturer ends up paying large sums of "severance" payments if it decides to terminate a contracted distributor (Business International, 1985). The purpose of this article is to review the criteria and introduce a computer-aided decision support tool designed to screen and qualify foreign distributor candidates. The tool can be used as part of a comprehensive and systematic approach to identifying suitable agents or distributors. Developed as an "expert system" this tool would supplement executive judgment by delineating relevant selection criteria and aiding the evaluation of alternative distributor candidates.
S. TAMER CAVUSGIL is Professor of Marketing and International Business at Michigan State University and Executive Director of the Center for International Business Education and Research at MSU. POH-LIN YEOH is Assistant Professor of International Business at the University of South Carolina. MICHEL MITRI is Assistant Professor of Computer Information Systems at Eastern Michigan University.
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EXPERT SYSTEMS AND INTERNATIONAL MARKETING APPLICATIONS In the last decade, expert systems (ES) have become practical and desirable tools to aid in making more effective and efficient management decisions. Fiegenbaum and McCorduck (1983) define an ES as an intelligent computerized software package that uses expert knowledge and inference procedures to solve problems that are difficult enough to require significant human expertise for their solutions. Successful business experience with ES suggests that they are valuable for capturing and disseminating knowledge. Although ES have been developed for several applications in marketing, their application in international marketing has been limited. This is unfortunate as international marketing decisions have several characteristics that are desirable for the application of ES. First, given the complexity of international marketing decisions, ES techniques have the ability to deal with numerous interacting variables that are both quantitative and qualitative in nature. Second, ES can be adapted to specific problems, thus allowing for the inclusion of situation-specific variables in different environments. Third, unlike structured decisions that can be easily handled by conventional modeling techniques (e.g., linear programming), ES are well-equipped to handle the unstructured and semistructured decisions common to international marketing problems. International marketing provides many opportunities for expert system development where problems in specific domains cannot be solved in a limited time with mathematical algorithms alone. An important decision in international business is the selection of foreign distributors and agents. Finding satisfactory foreign distributors is difficult, requiring time, finance, skill, and patients (Moore 1987). At the same time, the costly consequences of contract termination strongly suggest that the overseas marketing channel choice is a significant investment that should not be taken lightly. Although exporters can protect themselves by using carefully crafted distributor agreements, the best advice in minimizing problems is to pursue a systematic approach in the selection process.
Selection of the right distributor may be the most important decision. The objective of this article is twofold: (1) to demonstrate the potential application of expert systems technology to the foreign distributor selection process; and (2) to elaborate on the objective criteria to be used in the selection of agents/distributors. In the sections that follow, we will present detailed discussion of the distributor selection problem and of frameworks that have been suggested for solving this problem. Then we present an expert system, DISTEVAL (DISTributor EVALuator), which was developed at the Center for International Business Education and Research (CIBER) at Michigan State University. Based upon exploratory interviews with seasoned international business executives, five dimensions and specific criteria relevant to qualifying distributors are highlighted. We conclude with a discussion of what sound business practices may be adopted for distributor selection decisions.
SELECTING FOREIGN DISTRIBUTORS An important decision in international distribution is the choice between the firm's own channels of distribution and independent foreign distributors. Although the former allows a firm greater control over marketing activities of the product in the foreign market, several studies have shown that overseas distributors often represent the more feasible alternative (Bilkey 1978; Cavusgil 1990; Horton 1977; Seifert and Ford 1989; Garsombke and Garsombke 1986; International Management 1983). Rosson (1987) notes that overseas distributors represent a low-cost form of market entry, and their intimate knowledge and contacts in the local market are strong motivators for firms that are entering international markets for the first time. In addition, for many small and medium-sized firms that lack the necessary working capital to engage in a direct export mode of entry, foreign distributor's marketing capabilities regarding stocking, promoting, and selling the exporter's products are also an attractive consideration. Exporting through a distributor, however, entails some disadvantages. It limits the extent of learning about the target markets, it impedes direct communication with customers,
and it reduces the exporter's ability to give each product effective support if intermediaries carry nonrelated products or too many products. The key disadvantage is, however, the lack of control and flexibility that exporters have over the marketing activities of the foreign distributors (Rosenbloom 1978; Rosson 1987). The lack of control may be problematic in the long run if the foreign distributor cannot commit resources and marketing effort to the exporter's product. Considering that potential distributors have varying capabilities, needs, philosophies, and objectives that may clash rather than complement those of the manufacturers, it is important to select the "right" distributor that can act in the best interest of the exporter. Business International (1985) notes that " . . . an ineffective foreign distributor can set you back in years; it is almost better to have no distributor than a bad one in a major market." The development of a thorough selection process is also necessary because termination of distributor agreements in certain countries can lead to negative financial consequences due to indemnification clauses. Hence, comprehensive selection procedures are necessary to avoid poor choices that can be quite costly to remedy. In most firms, the evaluation of foreign distributors involves identifying both what to look for and where to go for the information. In addition to receiving unsolicited recommendations from own contacts, several public and private sources are available to assist firms in identifying foreign representatives. Two services are specifically offered by the U.S. Department of Commerce for this purpose: the Agent/Distributor Service (A/DS) and the World Traders Data Report (WTDR). Among the private sources, trade directories published by Dun and Bradstreet list foreign representatives both geographically and by product description. Other facilitating agencies such as banks and shippers may also be helpful in locating prospective representatives through their information networks. Once a manufacturer identifies several potential candidates, they must be compared and contrasted with each other against the relevant selection criteria. Whereas severn frameworks for screening foreign distributors have been proposed, one limitation is that they require quantification
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Selection s h o u l d be b a s e d on objective criteria. of most, if not all, of judgmental inputs (Beeth 1973; Business International 1983; Dunn 1979; Root 1983; S.hipley
the purpose of assessing the suitability of potential foreign agents or distributors.
1984). On one hand, certain attributes such as performance (e.g., sales figures and market share growth) can be easily quantified, thereby providing a solid base for comparisons. On the other hand, subjective criteria such as overall reputation and image of the distributor are more difficult to quantify and are subject to different interpretation. Another limitation of these evaluative frameworks is their potential to induce serious bias in the rating process because different analysts may assign different weights to the same criteria. In contrast, the ES approach can provide a systematic method for evaluation that incorporates both quantitative and qualitative reasoning processes. The next section provides an elaboration of the criteria employed by DISTEVAL, an expert system developed for
DISTRIBUTOR SELECTION CRITERIA As part of the process of developing the expert system, DISTEVAL, we interviewed a large number of seasoned international business executives who had been involved in agent/distributor selection decisions. Discussions with these experts, together with existing research on international distribution channels, formed the knowledge base for DISTEVAL. In a series of brainstorming sessions and Delphi studies, the experts agreed upon 35 attributes for systematically evaluating foreign distributors. These 35 criteria are grouped into five major dimensions and illustrated in Figure 1.
Overall Qualifications I Financial & Company Strengths
I Product Factors
• Ability to finance initial sales and subsequent growth • Ability to raise additional funding • Ability to provide adequate promotion and advertising funds • Product and market expertise • Ability to maintain inventory • Quality of m a n a g e m e n t team • Reputation among current and past customers • Ability to formulate and implement 2 to 3 y e a r marketing plans
• Familiarity with the product • Complementarity of product lines • Quality and sophistication o f product lines • Condition of physical facilities • Patent security
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FIGURE 1.
I
Marketing Skills • Experience with target customers • Geographic coverage • Customer service • On-time deliveries • Salesforce • M a r k e t share • Participation in trade fairs • M e m b e r in trade associations
I Commitment • Volatility of product mix • Percent of business accounted by a single supplier • Willing to keep sufficient inventory • Willing to commit advertising dollars • Commitment to achieving minimum sales targets • Undivided attention to product • Willing to invest in sales training • Willing to drop competing product lines
Criteria for evaluating foreign distributors.
I Facilitating Factors • Connections with influential people • Working experiencewith other exporters • T r a c k record with past suppliers • Knowledge of U.S. business • Proficiency in English
DISTEVAL can help in arriving at suitable candidates for foreign distributors. Financial and Company Strengths The nature of the distributor's existing business can serve as a good indicator of potential match with the manufacturer's needs. Experienced companies take time to inquire about the distributor's standing with current and past customers, suppliers, the local business community, and even competitors. Often an on-site visit is essential. What is the product and market expertise of the company? How does it treat customers? How adequate are the facilities? What is the quality of the management team? What is their track record? Companies often underestimate the importance of the distributor's potential to grow with the business. Even if the distributor is adequately qualified today, will it be able to manage and finance subsequent growth? If the distributor's financial standing will not allow them to raise additional funding necessary for expansion, the relationship is doomed to be a short one. Experienced managers emphasize that published figures about distributors' financial standing are not always complete or accurate. The need arises, therefore, to verify them through first-hand visits or reliable third-party opinions.
Product Factors The best distributors are those who are dealing in the same product line as yours, who reach the same market segments, and who have the technical expertise in servicing the customers. Of course, sometimes these distributors may be handling competing lines, in which case one needs to look for a firm handling related equipment. If the product is technically complex to sell and maintain, quality of the sales and service personnel becomes a critical choice factor. An additional factor to consider would be the distributor's ability to effectively take legal action against any violators of the manufacturer's intellectual property.
Marketing Skills Many distributors claim to cover their entire national territory, and some would be interested in a region encom-
passing several countries. In reality, except in very small countries, most distributors would fall short of being able to service the entire national territory because of diverse geography, financial or managerial limitations, limited access to retail distribution, or simple lack of motivation. Therefore, manufacturers ought to be concerned about the extent of the distributor's market coverage. Can the distributor reach all available customers? Are the sales and service outlets adequately spread? What market segments might be neglected? Of course, inadequate market coverage may be the basis for awarding several distributorships in one country, rather than a single, exclusive one. Apart from market coverage, the manufacturer needs to qualify the distributor's organization in terms of marketing competence. How well trained is the salesforce? How strong is the distributor with respect to trainability of its personnel, advertising, customer support and aftersale service? How aggressive is it in terms of cultivating the market?
Commitment Sometimes the only differentiating factor among several distributor candidates may be one of commitment to your business. Indicators of commitment include willingness to keep sufficient inventory, commit advertising dollars, invest in sales training, and provide adequate market feedback. Perhaps the best indicator of commitment on the part of the distributor is to drop competing product lines. If commitment is suspect, the manufacturer may wish to establish a trial period and build in a reasonable set of conditions for renewal. These expectations may include: an initial stock order, a certain level of advertising and promotional effort, minimum sales targets, and some degree of investment in sales and technical training. To the extent that there is a willingness to assume such responsibilities, there is a greater likelihood of successful partnership.
Facilitating Factors Apart from the dimensions captured by the previous factors, manufacturers need to consider a host of issues such as political clout within the country, previous experience
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Seasoned international business executives develop "best practices" in foreign distributor selection. of the distributor with other principals, management and accounting standards, and familiarity with legal regulations. Compatibility of management philosophies should also be considered. The manufacturer needs to assess to what extent the distributor's corporate and personal goals coincide with its own. It is not unusual to examine distributor's capabilities as a potential partner in the future for manufacturing under license or a joint venture.
DISTEVAL EXPERT SYSTEM In the DISTEVAL expert system, each criterion belonging to one of the five dimensions is assigned a weight of importance. The evaluative algorithm of DISTEVAL requires weights for dimensions and for the lower-level attributes that comprise them. These weights were determined via the knowledge acquisition process. In addition, each dimension has an associated set of potential ratings, also provided by the experts, together with minimum scores required to achieve these ratings. The quantitative evaluation from DISTEVAL, based on a weighted sum of the attribute scores, produces scores ranging from 0 to 100 for each of the dimensions. These scores can then be mapped onto verbal ratings, which begins the process of qualitatively interpreting the evaluation results (Mitri 1991). The overall goal of DISTEVAL is to assist in the selection of a suitable foreign distributor. New-to-export companies will find DISTEVAL appealing as it provides interactive opportunities for managers to understand how the system comes to a particular conclusion. Transparent reasoning helps managers make more effective decisions. Larger firms will also find DISTEVAL useful in situations where they need to replace an existing distributor or add a new distributor in the foreign market. Trade consultants and export promotion facilitators will also appreciate the functionality of the expert system as an educational and training tool.
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DISTEVAL improves the overall quality of the foreign distributor decision by providing a more consistent and well-defined methodology for decision making, sensitizing decision-makers to factors they might otherwise overlook, and reducing the time it takes to arrive at final decisions. The expert system also offers permanent and documented expert knowledge, thereby eliminating the costly duplication of scarce expertise. Finally, a decision support system such as DISTEVAL becomes a vehicle for conveying managerial prescriptions derived from actual experience. These insights and examples of "best practice" have been incorporated into the expert system. Some of these principles are presented in Table 1.
CONCLUSION The four scenarios described at the beginning of this article illustrate how disappointing and costly poor selection of foreign distributors can be for manufacturers. Unfortunately, these experiences are all too common. Discussions with executives reveal cases where selection is made on the basis of a single and, rather subjective, criterion such as potential distributor's proficiency in English or "decisionmaking style" Given the long-term nature of such partnerships and the potentially devastating cost of a termination, manufacturers ought to be much more systematic in the way they screen, evaluate, and select distributors. Each of the four scenarios could have been avoided had the manufacturer been using a comprehensive set of objective evaluation criteria. In this article, we described an expert system that aids in evaluating and selecting foreign distributors for international entry. DISTEVAL combines quantitative and qualitative decision-analytic techniques to provide a systematic methodology for distributor evaluation and selection. As discussed earlier, the distributor is a very important ingredient for successful market penetration; thus, selec-
TABLE 1 Managerial Guidelines for Selecting Foreign Distributors 1. It is vitally important that you visit the distributor at the company's place of business and get to know the people as well as possible in their environment. 2. It is important that the distributor have experience in the market segment in which your product participates. 3. The distributor must have not only the capability to provide adequate support to your products, but must also have the capacity (in terms of time) to market and service your products. 4. A distributor should commit sufficient time, people, and money to support the development and expansion of your market presence. 5. The greater the number of value-adding activities that the distributor is willing to provide to support your products, the greater the chance for Success.
6. It is important that the distributor be a recognized leader in your business in the market and is able to use that leadership to facilitate the development of your business in that market. 7. The entire management team of the distributor must be committed to the success of your product line, not just the top management. 8. It is important that the distributor have excellent relationships with the major customers in the market, and thereby can influence those customers to take on and/or use the new products. 9. The distributor must view the relationship with you as a partnership, where there is great mutual benefit to both companies to work together. 10. It is important that the distributor have excellent market coverage in the territory that you want the distributor to cover. 11. It is highly desirable that the distributor have a significant market share in the market segment for your product category, for that market share indicates important market strength. 12. It is very important to have a distributor sales force that is highly motivated, well-trained, oriented to selling your types of products, highly trainable, and known to the most important customers and to all those involved in the sales decision-making process for the products. 13. The distributor must be highly responsive to the service needs of the customers. 14. The rest of the business of the distributor should enhance the sale of your products, not detract from them in any way. 15. It is important that the distributor be willing to provide references that can attest to the success they have had in working with the distributor. 16. A great contributor to success in working with a foreign distributor is its success in working with other U.S. companies, so it is particularly important to know what other American companies the distributor represents and to talk with them to learn in detail of their experiences. 17. It is critically important that there is no language barrier that impedes the effective communications between the two companies. 18. To have a successful relationship with a distributor, your company must be willing to go more than half way in being a good partner to the distributor!
Needless to say, an expert system is not the final answer to any managerial problem. Where DISTEVAL becomes really useful as a decision support tool is in systematically qualifying candidate distributors and narrowing down the pool of candidates to a manageable number. In addition to using such a tool as a screening device, the experienced executive will rely on a number of sound practices. One such practice is to take the time to visit the facilities of the final candidates prior to making a decision. On-site evaluation is indispensable in advance of signing of distributors in key markets. Another good practice is to ask the prospective distributor for a local marketing plan and competitive analysis to use as a basis for evaluation. Such an exercise will reveal much about the prospective distributor's managerial competence and the degree of commitment to the venture. Third, smaller firms may rely upon a combination of networking among industry peers and selective telephoning to recommended contacts in the target market. Finally, when there is doubt about a prospective candidate's ability, the manufacturer is better off proceeding cautiously. In such a case, a trial agreement with agreed-upon sales targets may be the way to go-provided that termination without a costly compensation is a viable possibility.
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tion of a distributor is a task that should not be taken lightly. Expertise in distinguishing good from poor distributors is not easy to acquire, whereas lack of such expertise can lead to costly mistakes in judgment. These facts all suggest that expert systems may play a significant role in helping managers select the most suitable distributors for their international marketing efforts.
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