Influencing International Channel Choice of Small Business

The next step of any company after having set a firm stable ground is to go international to make the brand recognizable and make more profit. Having the company to be run in international level could be proven rather hard. Especially for the small business as the beginning are proven vital to any company to either blossom, or wilt. When a company makes a decision to go international, it is very important for it to decide on how it will be marketed internationally. There are few ways on how the products will be channelled in the country. Firms with high profiles can take the risks of having their products being distributed directly by them. As for the smaller firms it is advisable for them to distribute their products indirectly as this will be less risk for them since the outcome of their product could be good or bad internationally. (B. Ramaseshan and Mark A. Patton, 1994).

1.1: Background of the Study

Given the paucity of studies investigating international channel choice among small business exporters, examines the influence of selected variables on international channel choice decisions of small business exporters in one specific industry. Results of the analysis using the logistic multiple regression procedure show that three factors significantly distinguish small business exporters using independent channels from those using integrated channels. These factors are: first, company’s exports as a percentage of the total sales volume, second, international family heritage of the major export decision makers in the company, and third, importance of service requirements. The results indicate that firms with higher exports (as a percentage of the total sales volume) and stronger international family heritage tend to use independent channels, while firms with products for which the importance of service requirements is considered to be high tend to use integrated channels. The journal discusses the implications for the management of small business exports.

1.2 Problem Statement

According to Bello and Williamson (1984) highlighted the importance of channel choice and the structure of that channel in developing a marketing strategy and showed that the magnitude of the success a firm enjoyed in exporting was significantly influenced by the (formal) structure between channel members. Channel selection and structure is also important in the formulation of international marketing strategy in view of the fact that, once a channel has been set up, it will be very difficult to change. Anderson and Coughlan (1987) showed that new products tended to enter existing channels and that new manufacturers tended not to change, even from poor-performing channel members, because they did not want to disrupt the customer loyalty that had been established by the existing channel. Czinkota and Ronkainen (1988) suggested a model of the attributes which influenced basic consumer and industrial international channel options and

Described how channel configurations varied within industries, or within the same firm, for the same product because markets in different nations quite often had unique features. The model, labeled the “Eleven Cs”, explained the factors which determine the channel design an exporter used. The 11 elements of the model were: customer characteristics, culture, competition, company objectives, character, capital, cost, coverage, control, continuity, and communication. These factors were found to be important to both the development of new marketing channels and to the modification of those already in existence. The individual elements varied from market to market but seldom was one factor considered without the interactive effects of the others.

It was suggested that the marketer should use the “Eleven Cs” checklist to determine the proper approach to reach intended target audiences before selecting channel members to fill the roles.

1.3 Objectives of the research

According to the scope of research, certain factors need to be taken into consideration while placing objectives in support to the hypothesis being addressed under given research area. Moreover, the execution of objectives will be associated with several key dimensions, in which the study is facilitated to accomplish the aims identified below, such as,Identify what are the important factors that are influencing international channel choice.To examine, how effectively this factors can improvise on small business entry into international business.

1.4 Significance of Research

A number of small firms enter into international business without knowing the proper way, or the better way to enter into the international business which will end in failure of a good launch of the product and this will be very costly to the firm. Through this journal, a firm will understand every single channel that could be used as an entry into the international business. This will help them to have a better start for their business.

1.5 Scope of Study

Scope of study is to analyse the factors that influence on channel choice of international business. The research is conducted based on theories and researches of many other researchers’ journal.

Chapter 2: Literature Review

Firms usually seek a certain degree of control in their foreign marketing operations, following their commitment capabilities (human, financial, technological, marketing, etc.) and their attitude to risk. Thus, they are faced with the crucial decision of determining the appropriate level of internalization of their export marketing activities. Internalization is a mechanism that allows firms to perform and coordinate different business activities properly, better meeting consumer needs and receiving, in the best circumstances, some feedback from the market (Root, 1994). From the marketing side, internalizing functions requires a sufficient sales volume to justify it and to allow firms to acquire benefits associated with scope and scale.

However, these pure economic arguments are not sufficient by themselves to explain the variation observed in channel integration (Klein et al., 1990). The traditional “make or buy” analysis explaining an overall strategy cannot account for the variation in actual decision making.

2.1 Channel Choice In International Business

There are five hypotheses building on the theoretical framework given in the Channel choice in international business. We start from the IP-models claims that country knowledge, opportunity seeking, and cultural distance are the central concepts for explaining the international expansion of firms (Johanson & Vahlne, 1977).

The paper continues with the subsequent development of the IP-model (Eriksson et al., 1997) that claimed that internationalization knowledge is an important factor in explaining internationalization and the network aspects of customer and competitor knowledge (Johanson & Mattsson, 1987, 1988; Johanson & Vahlne,1990, 2003).

2.1.1 Country Knowledge

In a similar way, the organizational forms (foreign market operation methods) that the internationalization process takes represent a gradual resource commitment. First, the firm export incidentally, then systematically through local intermediaries, and eventually a subsidiary is established. In separate studies Johanson and Wiedersheim-Paul (1975), Davidson (1980) and Gatignon and Anderson (1988) have observed an increasing propensity to select wholly owned subsidiaries as experiential knowledge of the market increases.

Klein & Roth (1990)also claim that with greater experience in a foreign market there is a positive incentive forexporters to integrate forward. Therefore we claim that firms with more country experiencetend to use integrated channels to capitalize on their knowledge.

2.1.2 Market Growth

According to Penrose (1959) expectations of future outcomes are the immediate determinant of firm behavior, and this is also a fundamental tenet of the internationalization process model. The commitment decision of firms to a market is based on managers’ perceived ability to estimate present and future outcome of a market. Hence, if the expectation of a market’s potential for future growth is high the estimated risk of using a high commitment mode is reduced and thus the propensity to use an integrated channel increases (Johanson & Vahlne, 1977).

Such finding is reported by Calof and Beamish (1995) in their study of patterns of mode change. In their interviews with managers Calof and Beamish found that managers that felt more confident with the market i.e. perceiving it with a potential of being large enough led to increased resource commitments. Agarwal & Ramaswami (1992) also found that firms tend to use integrated channels in markets with higher potential. Therefore we suggest that firms that expect high market growth will position themselves to handle the increase in sales by using an integrated market channel.

2.1.3 Cultural Distance

In the internationalization process model (Bilkey & Tesar, 1977; Johanson & Vahlne, 1977) two dimensions of international expansion are identified: the geographical expansion and theexpansion in terms of resource commitment. The process model postulates that as the geographical and cultural distance between the home and the host markets increase, the more difficult it becomes for firms to collect and interpret incoming information properly. This ‘psychic distance’ between the home and the foreign market affects the selection of the market as well as the choice of foreign market operation method.

The cultural distancebetween the home and the host country influences a firm’s knowledge about a market, wheregreater dissimilarities between countries increases the difficulties of estimating the risk ofconducting business and thus enhance managers’ uncertainty (Carlson, 1966). Studies based on the logic of market uncertainty and organizational knowledge has shown that a high commitment mode such as a subsidiary is less preferred when the cultural distance between home and host country increases.Erramilli (1991) found that in service firms the choice ofhigh commitment mode decreased as the distance increased.

Davidson (1980), and Brouthers and Brouthers (2001) show that the usage of licensing and/or joint ventures increases withcultural distance. With increased cultural distance it may be more difficult to establish and manage integrated channels in markets because of cultural dissimilarities. We would therefore claim that firms prefer non-integrated establishment modes when cultural distance increases.

2.1.4 International Experience

A recent development of the internationalization process model (Eriksson et al., 1997) shows that international experiences generate a firm-specific procedural knowledge of how to internationalise. This type of knowledge is not specific to a particular market but relevant for all markets. Thus, Eriksson et al. (1997) argues that international experience improve a firm’s ability to search and evaluate information from foreign markets. Firms with little international experience may feel less confident in estimating the risk and future returns of a market and thus initially prefer to be less committed to a market (Johanson & Vahlne, 1977; Davidson, 1982).

Firms with experience from more international markets will be in a better position to handle sales on a specific market thus making integrated channels more probable. That firms tend to opt for integrated channels at higher levels of international experience has also been supported by subsequent empirical findings (Gatignon & Anderson, 1988; Erramilli, 1991; Aulakh & Kotabe, 1997). We would thus expect firms with more international business experience to use integrated market channels.

2.1.5 Customer Knowledge

From a network perspective establishment on a market is a question of starting a specific business relationship with a new customer in that country and we would therefore expect the firms knowledge of the customer to influence channel choice. Initially, the firm’s knowledge concerning the other specific partner is naturally low. If the relationship continues however, the interaction between the two concerned parties will lead to a situation where they learn the counterparts capabilities and needs and thus developing trust and interdependence between the firms (Håkansson & Snehota 1995; Hohenthal 2001; Håkansson & Johansson 2001).

The importance of knowledge and the subsequently development of trust have been illustrated by Lindstrand (2003) when studying business relationship development. The study found that knowledge about the counterpart increased the willingness to invest in the relationship and thus, increase their interdependence. Indeed, if the firm has acquired knowledge about its counterpart we believe that considerable time and effort has been put into the relationship, assuming that the need for coordination between the counterparts has increased (Johanson & Mattsson, 1987). Therefore, we suggest that if a firm has customer knowledge it will more likely use an integrated channel when operating on the market.

Chapter 3: Research Methodology

Questionnaire and measurement development

Several stages were involved in the process of questionnaire development. Initially, to search for items effectively operationalizing export entry mode choice, the body of literature on entry mode selection, exporting, export behavior and distribution channel management was reviewed and analyzed within a small group of Bachelor’s students and scholars. An exploratory small survey including export managers, domestic middlemen, and export government agencies’ executives was used assess the face validity of the items selected. Subsequently, the questionnaire was extensively pre-tested and refined in personal interviews with 50 managers in exporting firms to achieve content validity.

Data collection

As the attributes influencing international channel options differ considerably among different types of industries (Czinkota and Ronkainen, 1988), it was considered appropriate to study one particular type of industry. Accordingly, a list of small firms exporting water filtration and purification equipment was compiled using the latest American Export Register and other published sources. From the existing literature on aspects relating to international channel choice and in-depth discussions with selected small business exporters, a list of variables believed to be critical to the export channel selection for small businesses was initially identified

Measurement

Given the variety of specific channel structures and arrangements which are typically practiced in today’s global marketing efforts, it is somewhat difficult to standardize channel structure classifications. From the preliminary discussions we had with a number of small business exporters in the chosen industry, we found that the dichotomous classification determined, based on where the second channel (first middleman) is located (Albaum et al., 1989; Root, 1964), was relevant and appropriate for classification of the channel structure alternatives in our study of small business exporters in the water filter and purification industry.

Measurement analysis

Preliminary analysis of the measurement quality and psychometric proprieties of the different indicators is given by explanatory factor analysis. For each group of constructs, the observation of the Kaiser-Meyer-Olkin measure of sample adequacy and Barlett’s test of sphericity suggested that principal component analysis be employed to explore the presence of an underlying structure in the data. For the product characteristics, using an eigenvalue of 1 or greater as the factor selection criterion, in combination with the screen test, a multidimensional solution emerged. All items were included in the analysis due to their capacity of variation.

Chapter 4: Conclusion

This study focuses on the export mode choice of a wide range of small and medium-sized manufacturing firms recently involved with international marketing. Traditional effects were investigated empirically (e.g. product characteristics, environmental uncertainty), as were some effects not investigated empirically hitherto (i.e. export behavior characteristics) in the entry mode context. Furthermore, interaction variables representing the doubly strong link that TCA hypothesizes with specificity and uncertainty were tested. Combined, all the variables led to two models reflecting the independent principal effects and the effects when moderation is added.

The results will also be useful to small business firms in the development of international channel strategies. A significant finding of this study is that the factors influencing international channel choice in small firms in the water filtration and purification industry are different to the factors found in earlier studies in other industries and large firms. This suggests that elements critical to international channel choice and the magnitude and direction of their influence are product and country specific and also relate to the size of the firm.

This is an important finding for managers of small businesses in their decisions relating to channels for export markets. Another significant finding of this study is that the traditional “rules of thumb” are not followed by small business firms in international channel choice decisions. However, caution must be exercised while generalizing the findings of this study. The fit of the logistic regression model, though good for basic research, needs improvement.

The non- significant findings of a number of factors included in the study may be because of single item measures used for the study, not having a larger sample size, and the fact that the study was restricted to one industry and a single country which reduces the amount of variation in the data. Future research in different industry settings, with improvements in the development of measures and by including variables that are not considered in our study, will be necessary for greater theoretical development in the area of international channels to help managers faced with the complex task of determining international distribution channel structure.

References

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