Printer Friendly

The channel integration decision for small- to medium-sized manufacturing exporters.

ONE OF THE MOST IMPORTANT decisions exporters face is the mode of entry strategy into foreign markets. The choice of distribution channel in the international arena is widely acknowledged as one of the most difficult (Keegan, 1984; Robinson, 1978; Reid, 1987; Turnbull, 1987). For New Zealand exporters, isolation from major trading partners (Australia excepted) exacerbates the problem.

Approximately twenty-three per cent of New Zealand's Gross Domestic Product is exported. The primary sector accounts for 60 per cent of all exports, the manufacturing or secondary sector for 30 per cent. The latter sector is growing fast; a year on year increase of 8.3 per cent in volume was recorded from October, 1992 to October, 1993 (Key Statistics December, 1993). This is partly due to small- to medium-sized manufacturers entering export markets (Lindsay, 1990), and partly to an increase in existing exports. These manufacturers recognise that exporting can enhance profitability, spread risk, and provide the impetus to innovate and thus remain competitive.

Anderson and Coughlan (1987) state that one of the first decisions to be made by companies entering a foreign market is whether to distribute through a company-owned (integrated) channel, or through an independent (non-integrated channel. This distribution decision can be seen as an important `make or buy' one for management, and has been a debated issue in the economics literature as far back as the nineteen thirties. However, recent developments in agency and transaction cost theory have provided new opportunities for explaining and testing key relationships. Klein, Frazier and Roth (1990) and Anderson and Coughlan (1987) considered the extent of vertical integration of individual firms into various export markets.

Vertical or channel integration has, however, only been examined in American and UK multinational corporations, which implies that it is primarily the domain of larger manufacturers which have the corresponding resources for investment in a foreign market. Other authors (Chan, 1992; Reid, 1987; Rosson and Reid, 1987; Turnbull, 1987; Varaldo, 1987) suggest that issues of channel ownership or integration do have application in the SME (Small-to-Medium Exporter) environment. Hills (1989, p64) suggested that in order for small firms to effectively compete in the future, they will need to join, or at least relate to, vertical marketing systems. In addition, trade publications such as New Zealand's Export News have cited several cases of small- to medium-sized companies taking increasing equity stakes in their distribution channels.

While exporting continues to be a major factor in New Zealand's economic recovery, and given the contribution of small- to medium-sized manufacturers to this growth, it is important to study the factors that determine channel integration. This exploratory research attempts to do this in the context of the TCA framework.

Literature Review-channel Theories

Two theories attempt to explain channel integration: the Internationalisation Theory (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977; Rosson, 1987), and the Transaction Cost Analysis approach (Williamson, 1975; Anderson and Coughlan, 1987; Klein, Frazier and Roth, 1990).

The International Theory (or export stages theory) is widely accepted in the export literature, and states that companies begin exporting in nearby markets using simple, indirect methods such as sales agents. As export experience and market dependency increases, companies adopt more direct methods of operation, resulting in a wholly-owned sales office or even a manufacturing plant in the export country.

Johanson and Vahlne (1977) of the Uppsala School have further extended the export stages theory by focusing on changes in the organisational structure as a differentiator of export involvement. They suggest that companies have a natural tendency to integrate vertically over time and in a set order. Their focus is primarily on the links between export dependency, the way market information is acquired, resource commitment, and export organisation (Turnbull, 1987, p23). For example, sales subsidiaries, the last stage of internationalisation, are considered to provide more control (compared to independent agents), and information is more easily directed to and from the market. In addition, companies acquire `resource-influencing factors' through the sales subsidiary, encouraging the full production of products by the company in the export market. In support of the stages theory, Rosson (1987) traced 21 manufacturer-intermediary relationships over a seven-year period and found that most of the original export middlemen were dismissed and replaced by manufacturing personnel or another intermediary.

Reid (1983a, 1983b, 1984) and Turnbull (1987) see several limitations to the stages model. Firstly, the model implies that companies move through each and every stage, making no allowance for instances when channel structures do not change automatically or in a set order. In fact, other authors have showed that small businesses do not vertically integrate even in the domestic market, as they did not perceive they had the skills to distribute and manufacture their products (Perry, 1986/1987). This reluctance to vertically integrate is only exacerbated by doing business in the international environment. Further, Weaver and Pak (1990) found that Korean exporting SMEs used a pragmatic mixture of direct and indirect channels based on `what works', rather than adhering to a preconceived exporting stages as suggested by the model.

Secondly, the export stages model does not allow for a company using a combination of channels in different markets, or the same market, a factor which makes it difficult to describe the company's stage of internationalisation.

The last and perhaps most important challenge to the export stages theory questions the fundamental theoretical validity of the approach (Reid, 1983a, 1983b, 1984). The theory underlying assumption, that companies develop more formal structures for handling export markets as their dependence on these markets increases, is extensively criticised.

Transactional Cost Analysis (TCA) was first suggested by Williamson (1975, 1985) and was supported by Reid (1984) as an alternative contingency-based theory. The basic premise of TCA is that the company internalises those activities it is able to perform at lower cost, and relies on the market for activities in which other providers have a cost advantage (Klein et al, 1990).

Central to the TCA theory is that the company is better off a priori choosing an independent and local channel (e.g. a distributor or an agent) because that channel is more likely to have the expertise to market the product efficiently (Williamson, 1975). While a company is using that independent channel, the distributor acquires 'assets'; product and brand knowledge, good working relationships with suppliers and customers, and competitive knowledge. These assets represent transaction costs for the manufacturer - the more the assets build up over time the higher the transaction costs. In a highly competitive market where there are many distributors with the same level of expertise, transaction costs are low as the company can easily find new distributors and/or can replace non-performing distributors. If, however, effective distributors are in short supply, then transaction costs are high, and the company cannot easily find new distributors (to expand) or replace non-performing ones. In this situation, the company is likely to integrate the channel in order to control and motivate the distributor.

Empirical support for this theory has been mixed. Anderson (1985), Anderson and Coughlan (1987), John and Weitz (1988), and Klein, Frazier ad Roth (1990) found some support, with the last named showing also that production costs were more dominant than transaction costs.

The chief criticism of the TCA theory is that it considers only economic and environmental factors. Other authors have therefore extended the model to include political, product, and market factors (Anderson and Coughlan, 1987; Kim and Daniels, 1991). Further, the issue has only been examined in multinational companies and across certain industries, limiting the scope for generalisation. Finally, no consideration has been given to the importance of behavioural factors on the channel integration decision.

Research Question And Constructs

A new model is proposed which describes the most important factors that influence the channel integration. Some previously supported constructs are also re-tested in the New Zealand environment and included in the model.

The research question is as follows: What are the key factors that determine the nature and degree of channel integration for New Zealand Small- to Medium-sized exporters?

Central to this model is the concept of channel integration or equity stake in the channel. While many authors have defined their own channel typography (Ansoff, 1982; Rothchild, 1983; and Johanson and Weidersheim-Paul, 1982), Terpstra and Sarathy (1991) include joint venture, licensing, and foreign manufacturing. Similarly, this study characterises channel forms in a continuum from non-integrated (i.e. without equity) to fully integrated (wholly-owned), thus, direct export, locally-based agents, foreign-based agents, licensing, joint venture, wholly owned sales subsidiary, and foreign manufacture.

Ten factors are proposed in the new model, seven of which have been tested in previous studies (Kim and Daniels, 1991; Anderson and Coughlan, 1987; Klein, Frazier and Roth, 1991). The following three constructs were also tested to determine the direction of the relationship, if any, with channel integration: Experience, Multiple Channels and Political Factors.

Proposition One: There is a positive

relationship between transaction

specific assets and channel integration

(as found by Kim and Daniels, 1991;

John and Weitz, 1988; and Anderson

and Coughlan, 1987).

The questions asked in this study have incorporated those outlined in the above studies, but were extended to include the importance of good working relationships, as suggested by Anderson and Coughlan (1987). The idea behind this construct is that a good working relationship with distributors or agents may be a prerequisite for effective investment with that company.

The following constructs were used to define asset specificity:

* the accumulation of brand knowledge by the agent or distributor;

* the accumulation of competitive `inside' knowledge by the agent or distributor;

* the level of investment in equipment and facilities in the foreign market on the behalf of the third party intermediary;

* the level of training involved necessary to effectively sell the product, and;

* the importance of a good working relationship between the distributor and the manufacturer.

Proposition Two: There is a positive

relationship between sales value and

channel integration.

Klein et al (1990) demonstrated a positive relationship between sales volume of a particular product line and channel integration. This, in fact, had a stronger relationship than transaction specific assets (contradicting Anderson and Coughlan, 1987, John and Weitz, 1988), suggesting that a production cost rather than a marketing mentality drives channel decisions. Note that in this context sales value is used to express what is sometimes referred to as export intensity (i.e. percentage of export sales to total sales). In this study, the term sales value is used to be consistent with the TCA framework.

Proposition Three: There is a positive

relationship between company size and

channel integration.

Mixed support for this construct exists in the literature (Rosson and Ford, 1987; Turnbull, 1987; Reid, 1983). However, Samiee and Walters (1990) make the point that companies which stay with independent channels are more likely to be hindered by lack of resources due to company size. It is expected that for very small New Zealand firms (i.e. with employees of less than 50 and an annual turnover of less than $5 million) the use of independent channels is more likely to be a permanent arrangement.

Proposition Four: There is a negative

relationship between a high level of

uncertainty and channel integration.

The organisational theorists' viewpoint of uncertainty argues that looser structures (less vertically integrated) are more effective under conditions of high external uncertainty (Lawrence and Lorsch, 1967, Pfeffer and Salancik, 1978). A flexible organisation is seen to be more able to cope with changing circumstances. It is quicker to act, and responds and monitors the environment more easily than a fully integrated firm.

The following items are used to represent uncertainty as defined by Klein et al 1990, p200:

* the instability of the market;

* the instability of the distributors/ agents in the market;

* the reliability of the distributors/ agents in the market;

* the number of final users;

* the number of customers;

* the number of competitors.

Proposition Five: There is a positive

relationship between product

differentiation and channel


Product differentiation may also influence channel choice. Anderson and Coughlan (1987) found that products that are more differentiated (less substitutable) tend to be distributed through integrated channels. The rationale behind this construct is that products that are similar, tend to attract competition based on price. In this scenario, a distributor's flatter overhead structure can often absorb the incidence of price competition better than a wholly-owned sales subsidiary. In addition, differentiated manufactured products may require more expertise to sell, thus heightening the likelihood of an integrated channel.

Proposition Six: There is a positive

relationship between high level of

service and channel integration

The literature has mixed support for this relationship. Etgar (1978), Keegan (1984) and Terpstra (1983) found that integrating the channel helps ensure the service is carried out. However, in their industry-specific studies, Anderson and Coughlan (1987) and Kim and Daniels (1991) found no significant relationship between service and channel integration.

Proposition Seven: There is a positive

relationship between cultural similarity

and channel integration.

The choice between an integrated or independent channel may depend on the country being entered. (Keegan, 1984; Terpstra, 1983; and Thorelli, 1980). Anderson and Coughlan (1987) re-tested this by looking at the behaviour of USA subsidiaries. Managing an integrated channel may be more difficult in countries that are culturally dissimilar to the home country. Davidson (1982) suggested the reason for this is that US management techniques may not transfer readily to the foreign investment. This is in part true, but may be also due to language, business and cultural barriers that occur in the foreign country.

In sum, the literature suggests a model of overseas distribution channel choice depending on many factors. This model has attempted to assimilate the major, generalisable forces influencing channel selection.

Method of Research

The main aim of this research is to define the parameters of a new model of channel integration. As seen from the constructs above, detailed information about the channel integration process was sought in addition to how and why managers went about the process. Emphasis was also on the content of the channel integration in terms of motivations, expectations and desired outcomes of the SMEs involved. Also, insight was sought from those who had not integrated the channel. Thus, the exploratory nature of this research lent itself to in-depth personal interviews (Baker, 1991).

A senior member of the marketing or management team from twenty companies was interviewed. These interviews were conducted over the time period from March, 1993 to dune, 1993. This number was chosen to encompass a wide range of manufacturing exporters (each from a different industry); while at the same time being small enough to manage the analysis of such detailed data. In addition, it was hoped that although small, the sample would be big enough to provide an element of comparison and generalisation.

The industries selected were: rural telecommunications, electrical engineering, textile manufacturing, electrical fencing wire, computerised medical equipment, construction, timber, specialised outdoor leisure equipment, office furniture, convection heating, computerised moisture meters, wallpaper manufacturing, automobile parts, industrial glasses, computerised service station systems, industrial drainage and sail manufacturing. Each company selected conformed to a different SIC classification as used by Statistics New Zealand.

Nearly all of the companies selected for this study had a history of operating in the pre-1984 economic environment where export subsidies, high protectionism and inflexible wage structures were the norm. In this environment, cost-overruns, inefficiencies and poor customer service were common. These SMEs had to endure a decade of radical economic restructuring which involved changing their operations drastically to respond better to the increasing demands of the international customer. All interviewees had experienced fluctuating exchange and high interest rates in the mid- to late1980s, and the devastating effect of the stock-market collapse. The SMEs were interviewed for this study from March, 1993 to June, 1993 when New Zealand was experiencing the first wave of economic recovery due to stable, low inflation, competitive interest and lower exchange rates.

In order to allow for replication, criteria for each company had to be consistent:

1) Each company had to conform to the `small-to-medium-size' definition:

Total Sales: Small : Less than $5


Medium : $5-50 million

Employees: Small : 10-50

Medium: : 50-250

2) Each company had to have at least two export markets both to reflect the number of export markets and provide a comparison with other New Zealand export studies (Dau, 1990; Lindsay, 1991).

3) Companies utilising multiple channels in their export operations and companies with only one mode of distribution were included.

4) Exporters to Asia, South America (i.e. Latin countries), the Middle East, Africa, Europe and Australia were included for cultural comparison.

5) A balanced number of exporters producing different types of products. For example, firms producing nuts and bolts, and cut timber logs were classified as `commodities'. Higher value added products such as office furniture and log fires were classified as `medium complex', while customer specification items such as specialist engineering systems, and sail design systems were classified as `complex'. The classification was based on the level of branding, the amount of after-sales service, and the level of manufacturing sophistication.

The sample consisted of three main groups:

i The Direct Integrated Group: companies that had integrated directly, i.e. had set up joint venture or wholly-owned sales subsidiaries without utilising an existing distributor.

ii The Indirect Integrated Group: companies that had integrated through existing distributors (consistent with TCA).

iii The Non-integrated Group: companies that had used only third party distributors or agents.

Direct Integrated Firms

The companies in the direct integrated group had not followed the stages model. Carter Engineering Ltd(1) was typical of this group. A manufacturer of soft-starter devices for manufacturing plants, this firm initially used distributors in the UK to market their world-first product. Problems associated with a lack of product knowledge forced them to terminate the relationship with the distributor. By this time, they had developed a main-stream use of the product, and decided to set up a sales subsidiary in the UK and Australia to service those market themselves. At the time of the interview, Carter had under 40 employees and a turnover of approximately $US 20 million. In addition to the subsidiary in Australia, Carter also contracted a distributor to assist the sales office by establishing a market aimed at smaller manufacturers. Thus, in this market, a combination strategy in different territories was preferred. In Canada, however, the situation is very different with one distributor marketing to Canadian manufacturers. According to Carter:

"Our distribution arrangements are

very market driven. The strategy we

have is to research the market

opportunities and find out what

market is worth developing given our

resources. That means we tend not to

have a set formula for each market - we

are flexible, just like our clients."

The most compelling reasons to channel integrate for Carter were sales volume, the bad experience with the original distributor and the need for greater market control and long-term profitability.

Indirect Integrated Firms

Unlike the first group, the second group of respondents had integrated with existing distributors, rather than starting up in the foreign country on their own. Allan Electronics(2) was typical of this group. Stated the International Marketing Manager:

"We manufacture a range of electric

wire products and export them to

various countries around the world. We

have a certain philosophy about how

we manage channels over time. We do

not see ourselves as a manufacturer or

an exporter even though 80 per cent of

what we sell is manufactured here on

site. The definition of our company is a

designer and manager of a marketing

system, so what we do in the channel is

a key aspect of our business."

Allan Electronics has a policy of integrating with all their major distributors in order to grow their business. With distributors in Europe, North America and Australia the company is slowly developing equity positions with most of those organisations:

"We are now looking to license the

manufacturing part of the business for

the first time ever, and we are going to

license to a channel member. Basically,

we are taking control of the channel

with equity positions in order to

influence the way the market is

developed. We will be better able to

have an input into the way standards

are designed, etc. We believe the only

way to control and develop the market

is to have a strategy of equity positions

in the channel."

Non-integrated Firms

The final group of respondents had not integrated the channel, but used distributors as their permanent mode of entry. Typical of this group was Ajax Engineering, a manufacturer of nuts and bolts used in the commercial construction industry. Ajax state their products are treated as a commodity on the international market and are handled by distributors who are used to dealing with multiple suppliers and buyers.

"The keys to success in this market are

fleet footedness, good quality and

competitive prices and that calls for a

simple, quick and efficient

international distribution system."

Ajax markets primarily to Australia and South East Asia - anywhere where there is growth and commercial development. Asia is a crucial market and the long-term relationships the marketing manager and CEO have built up over thirty years exporting gives them a formidable reputation in that market. They do not see the need to integrate as they concentrate on their manufacturing expertise - they have ISO 9001 and are an accredited tester of construction hinges and bolts. They rely on their distributors to do the marketing - particularly when dealing with different languages and business practices.

In total, twelve respondents had integrated the channel; while the remaining six had not. Of these six, over half were intending to integrate within two years. Table 1 shows the number of different channel structures used by respondents.

Table 1

Number of Different Channel Structures Used by Sample
Channel Structure                       n--20 firms

Direct Export                               4
Local-based agents                          1
Foreign-based agents                        7
Foreign-based distributors                 11
Licensing                                   1
Joint venture - sell only                   5
Joint venture manufacture and sell          2
Wholly-owned sales subsidiary               7

During each interview, respondents were asked a consistent series of questions that directly related to each construct and their experience of the channel integration process.

Interviews were between one and two hours depending on the complexity of the marketing operation in each organisation, and were taped and transcribed. The in-depth personal interview allowed the author to tease out the differences between and highlight the similarities with previous studies of this kind and adapt the model appropriately for the New Zealand environment. Respondents were asked to outline the types of products they were exporting, where the key markets were and to provide a brief outline of the different types of distribution channels used.


Table 2 summarises the key findings of this study.
Table 2
Key Findings

Construct                            Proposed        Actual
                                     Relationships   Relationships

1)1Transaction Specific Assets
  * Good working relationships             +              +
  * Brand knowledge                        +              +
  * Levels of training                     +            mixed
  * Competitive knowledge                  +            none
  * Investment equipment and
    facilities                             +            none
  * Control                                               +
  * Profitability                                         +

2) Sales Value                             +              +
3) Company Size                            +              +
4) External Uncertainty                    -              -
5) Differentiated Products                 +              +
6) Service Level                           +            mixed
7) Cultural Similarity                     +              +
8) Experience                                             +
9) Multiple Channels                                      +
10) Political Factors                                     -

KEY: + positive; - negative.

1. Transaction Specific Assets

Respondents were asked to rank each transactional specific factor in terms of its impact on channel integration. There was fixed support for the relationship between transaction specific assets and channel integration.

Interestingly, good working relationships with the distributors was ranked highest of the TCA factors by a large majority of all respondents. Anderson and Coughlan (1987) cited the absence of this construct as a limitation of their study. The importance of good working relationships with third parties has largely been addressed in previous research (Rosson and Ford, 198O, 1982; and Reid, 1987) but seldom within the context of TCA.

The remaining constructs received mixed support. In particular, although many respondents cited brand knowledge as the next most important factor, a quarter stated that they thought it was not important at all. Overall, brand knowledge was more important for companies that were selling complex, technical products, resulting in a need for distributors to understand the product in-depth.

The level of training required by distributors had a varied impact on channel integration. The relationship was stronger, however, for those distributors who sold complex and technical products rather than commodities.

Manufacturers who stated that product training was not important deliberately sought out distributors who already had sufficient product knowledge as a way to contain costs. In those cases, the amount of training provided was not relevant to the channel integration decision.

There appeared to be no relationship between competitive knowledge and the decision to channel integrate. Most manufacturers stated that market information or scanning was a job done by their third parties regardless of integration. They perceived that part of a good third party's job was to have a deep understanding of the market and competitors. Indeed, most third parties were selected for their market and product knowledge.

There also appeared to be no relationship between channel integration and the level of investment in equipment and facilities. Most manufacturers looked for third parties who already had the necessary equipment and facilities to sell their products.

In conclusion, there is partial support for a relationship between transaction specific assets and channel integration (Proposition One).

1.1 Others Factors

Respondents indicated other factors that were not included in the model. Nearly all cited control as a major influence on the decision to channel integrate. Manufacturers generally believe that by taking an equity stake in the channel, far more control can be exercised over both strategic marketing decisions and the development of the actual market. A second important factor was long-term profitability. The greater the manufacturers' equity, the better the opportunity to price products strategically.

2. Sales Value

Sales value was the single most important factor in the decision to channel integrate, overriding the importance of transaction specific assets. This finding supports Klein et al (1990) who demonstrated a positive relationship between sales and channel integration, and found the relationship to be stronger than transaction specific assets. Kim and Daniels ( 1990) also found the relationship between channel integration and sales value to be positive. In this study, three-quarters of all companies that were channel integrated exported more than 50 per cent of their total business turnover. Of the sample that used third party intermediaries (the nonintegrated group), all exported less than 50 per cent of total turnover, with the majority exporting 20-25 per cent of total turnover. Therefore, there is support for the proposition that a higher percentage of total export sales is likely to influence channel integration (Proposition Two).

This finding is significant as it implies that companies use sales as a measure of performance prior to integrating the channel, and as a justification for integrating. Thus, there is some support for a stage approach to channel integration for small- to medium-sized manufacturers. However, in opposition to the internationalisation theory, third parties are more likely to be integrated rather than abandoned.

3. Company Size

All respondents were convinced that company size affected the decision to integrate. They shared the view that larger companies could better afford to integrate than smaller ones. This view however, differs from the reality: only one

small company and less than half medium sized ones had not integrated.

On closer analysis, the nature or degree of integration was an issue. Three out of the four small companies that had integrated had either licensed or set up joint ventures of under 50 per cent shareholding, while only one company had enough resource to set up a sales subsidiary of six people in the UK. Amongst the medium-sized companies over half had integrated. More subsidiaries were evident, but most companies operated joint ventures, either with a competitor, distributor, or existing distributor. Thus, although lack of resources did not prohibit integration for the majority of companies in the total sample, the degree of integration was dependent on the size of the company and the resources available.

In conclusion, there is a positive relationship between company size and the degree of channel integration (Proposition Three).

4. External Uncertainty

Independent channels were used in volatile markets. Most companies characterised at least one market they were serving as `volatile' - as defined by Klein et al, 1991. The most volatile markets in this study were Asia, Africa, the Middle East and South America. This finding supports Klein et al's (1991) study which found that third party intermediaries predominated in highly volatile markets. Interestingly too, commodity products were more vulnerable to unscrupulous third parties and volatile markets than specialist engineering products. There is a negative relationship between a high level of external uncertainty and channel integration (Proposition Four).

5. Differentiated Products

There was some relationship between product differentiation and channel integration (Proposition Five). This was particularly true of companies which had integrated from the start of their export operations, or had developed engineering products which required a lot of pre-sales service and some after-sales service. These companies preferred to sell directly to users for whom they had specifically designed the product. They had therefore set up integrated channels, perceiving that these could handle specification-driven products better than third parties.

Some manufacturers utilised a combination of channels, selling complex and/or unique products through a joint venture or sales subsidiary while using a third party to sell the introductory version or only support the more complex one. An interesting point here is that these manufacturers in this situation used different channels for different products in the same market. This careful and deliberate channel strategy was integral to their successful international marketing effort.

6. Service Level

There was little support for the relationship between service level and channel integration (Proposition Six). Of the total integrated group (i.e. both integrated groups), only half the respondents sold products requiring a high level of pre- and/or after-sales service. A similar mix of products was also sold in the non-integrated group. This finding supports two previous studies (Anderson and Coughlan, 1987; Kim and Daniels, 1991) which found no significant relationship between service and channel integration. While the mixed response in this current study could be attributed to the small sample size, a more likely reason is that the level of service required to sell the product effectively is likely to vary by product and industry. In some instances, third parties provide appropriate service levels while in others the integrated channel is better.

Results also differed by product complexity. Interestingly, companies which sold more complex products requiring a high level of both pre- and after-sales service used integrated channels, consistent with Proposition Five. Manufacturers selling commodities or relatively simple products (i.e. designed to a standard set of specifications) were less likely to integrate. Commodity products typically require little pre- or after-sales service. This finding supports the argument that service level and channel integration are dependent upon product type.

7. Cultural Similarity

Channel structures in Asia, South America (i.e. Latin countries), the Middle East, Africa, Europe and Australia were compared to discover the relationship between cultural similarity and channel integration.

In the non-integrated group, over half of the total markets served by third parties were non-western. In the total integrated group, only three companies had integrated with Asian, South American, or European countries in joint venture operations. All the rest had integrated in Australia, the UK, or the USA. However, these companies indicated they would integrate in other non-western countries, but only in the joint venture situation. This is because they believed foreign locals should be employed to overcome language and cultural issues, and because their own language expertise was not high. In addition, they perceived that local investment aided market acceptance in some countries.

In conclusion, there is some support for the relationship between channel integration and cultural similarity (Proposition Seven).

8. Experience

There is some relationship between years of experience in the foreign market and channel integration (Additional Construct One). The direct integrated group had all integrated after utilising various forms of experience. They had all integrated with existing third parties - either failed or successful distributors - or had bought into an existing competitors integrated channel. Both findings suggest that experience affects the decision to integrate.

9. Multiple Channels

All respondents had a high rate of multiple channel use across different markets which indicated a greater level of channel sophistication than expected. In addition, most of the total integrated group used a combination of channels in the same market, joint ventures and sales subsidiaries served a different market segment from either agents or distributors in the same market.

For smaller companies, the combination of one or two integrated channels plus up to 10 non-integrated ones meant they could serve many more markets in a more cost-effective manner. In addition, by concentrating on just one or two integrated channels, real market development could take place, without over-stretching limited management resources. The use of multiple channels seems to have a positive impact on channel integration: a few strategic markets can be identified and developed by integration while other markets are served by third parties, thus spreading the risk (Additional Construct Two).

10. Political Factors

The most commonly cited political factors (not in order of importance) were:

* type of political regime (if not a democracy);

* existence of civil war;

* level of economic stability;

* level of tariffs, tax and/or disincentives;

* existence of exclusive trade deals with other countries.

Most of the integrated group said they studied each market and weighed up the political implications prior to their channel integration decision. Some markets, such as China and South America, ranks poorly on some criteria, but well on others, so well that three companies had joint ventures in those countries. As political factors are specific to each country, there are doubts about which would affect channel integration. Initial indications are that while adverse political factors may militate against channel integration, the degree of adverse political factors certainly does affect the level of channel integration (Additional Construct Three).


This research has found some key insights about the channel integration decision for New Zealand small- to medium-sized export manufacturers. These are:


New Zealand manufacturers are becoming more proactive in their channel strategy, striving to use the distribution channel to differentiate in the export market. Their use of multiple channels to cover particular market segments in the same country, indicates their growing awareness of the importance of the type of channel to the overall marketing strategy.

The successful implementation of channel integration also depends on the quality of the distributor. Manufacturers who have selected distributors fairly rigorously have enjoyed more success than those who have appointed `ad hoc'. A planned approach to distributor selection is critical for future market developments, ensuring that the distributor is not only right for the product, but also for the company, and that the exporting manufacturer and the distributor can work together.


New Zealand small- to medium-sized manufacturers appear to be flexible and willing to work in partnerships with other organisations in different countries. All manufacturers spoke of the importance of their relationship with their channel partners, regardless of integration or third party structures. A good relationship makes channel integration much easier in the long run, is highly controllable, and is often the natural result of good selection criteria and ongoing brand management.

Most manufacturers have made mistakes with their channel strategies, particularly with third parties. One of the most common is arranging any any distributor to represent their companies, leading to disappointments and even to some companies having to leave the market. New Zealand small- to medium sized manufacturers need to recognise the importance of their contributions to the market and make sure that the third party they select is worthy of their product.


Erroneously, small- to medium-sized manufacturers believe that the fully-integrated option is costly. In fact, several manufacturers experience higher costs with joint ventures than with sales subsidiaries, due to the high costs of compliance associated with the joint venture option. New Zealand small- to medium-sized export manufacturers need educating about their foreign market options.

In conclusion, this study has shown that the channel integration decision is so important that most small- to medium-sized exporters will have to decide whether to integrate or select or maintain third parties. This study has attempted to shed light on some of the factors that influence that decision.

Future Research

This exploratory study has confirmed the major variables that influence the channel integration decision in the small-to medium-sized export manufacturing environment. It has shown that small companies can and do integrate and has provided some insights and theoretical generalisations into the channel integration decision. There is a significant opportunity to test the model developed here via a larger empirical sample. Such research could assist New Zealand companies by alerting them to innovation in export channel strategy.


(1) Company name is disguised for confidentiality reasons. (2) Company name is disguised for confidentiality reasons.



Ansoff, H. I. (1982), Strategic Dimensions of Internationalisation, European Institute for Advanced Studies in Management, Brussels, mimeo, October.

Ahmed, A. Ahmed (1977), `Channel Control in International Markets', European Journal of Marketing, Volume 11, No. 4, pp327-336.

Anderson, Erin and Weitz, Barton (1986), `Make or Buy Decisions; A Framework for Analysing Vertical Integration Issues in Marketing', Sloan Management Review, Volume 27, Spring, pp3-19.

Anderson, Erin, and Coughlan, Anne (1987), `International Market Entry and Expansion via Independent or Integrated Channels of Distribution', Journal of Marketing, January, 1987, pp71-82.

Baker, Michael J. (1991), Research for Marketing, The Macmillan

Press Ltd., Hampshire RG21 2XS.

Bello, D. C., and Williamson, N. C. (1985), 'Contractual Arrangements and Marketing Practices in the Indirect Export Channel', Journal of International Business Studies, Summer, pp65-82.

Bucklin, Louis (1966), A Theory of Distribution Channel Structure, Berkeley, CA: Institute of Business and Economic Research.

Chan, T. S. (1992), `Emerging Trends in Export Channel Strategy - An Investigation of Hong Kong and Singaporeran Firms', European Journal of Marketing. `Perspectives of the Pacific Rim', Volume 26, No. 3, pp18-26.

Coughlan, Anne T. (1985), `Competition and Co-operation in Marketing Channel Choice: Theory and Application', Marketing Science, Volume 4, No. 2, pp110-129.

Dau. Ramadahani, K. (1991), Marketing Orientation and Export Performance in the New Zealand Manufacturing Industry. Unpublished PhD Dissertation, Victoria University of Wellington, New Zealand.

Economics Department of ANZ Banking Group, December, 1992, New Zealand Economic Focus.

Etgar, Michael (1978), `The Effects of Forward Vertical Integration on Service Performance of a Distributive Industry', Journal of Industrial Economics, Volume 26, March, pp249-255.

Hills, Gerald E. (1989), `Technological and Competitive Forces on Distribution Systems in the USA: Worldwide Research Implications', International Small Business Journal, Volume 7, No. 4, July-September.

Johanson, J., and Wiedersheim-Paul, F. (1975), 'The Internationalisation Process of the Firm: Four Swedish Case Studies', Journal of Management Studies, October, pp305-322.

Johanson, J., and Vahlne, J. (1977), `The Internationalisation Process of the Firm - A Model of Knowledge Development and Increasing Foreign Market Commitment', Journal of International Business Studies, 8 (Spring/Summer), pp23-32.

John, George, and Weitz, Barton (1988), `Forward Integration Into Distribution: Empirical Test of Transaction Cost Analysis', Journal of Law, Economics and Organisation, Volume 4, Fall, pp121-139.

Keegan, W.J. (1984), multinational Marketing Management, Prentice-Hall Inc., Englewood Cliffs, NJ, 3rd Edition.

Kim, Jooheon, and Daniels,John D. (1991), `Marketing Channel Decisions of Foreign Manufacturing Subsidiaries in the US: The Case of the Metal and Machinery Industries', Management International Review, Volume 31, No. 2, pp123-139.

Klein, Saul, Fraizier, Gary L., and Roth, Victor J. (1990), `A Transaction Cost Analysis Model of Channel Integration in International Markets',

Journal of Marketing, Research Volume XXVII, pp196-206.

Lawrence, Paul, and Lorsch,Jay (1967), Organisations and Environments, Cambridge, MA: Harvard Business School

Lindsay, V. (1989), Factors Influencing the Success of New Zealand Exporters, Masters of Business Administration Research Paper, Victoria University of Wellington.

(1990), Export Manufacturing - Framework for Success. Report prepared by Trade Development Board.

Perry, Chad (1986/1987), `Growth Strategies for Small Firms: Principles and Case Studies', International Small Business Journal, Volume 5, No. 2, Winter.

Pfeffer, Jeffery, and Salancik, Gerald (1978), The External Control of Organisations: A Resource-dependence Perspective, New York: Harper and Row Publishers Inc.

Porters, Michael (1985), Competitive Advantage, New York: The Free Press.

Reid, S. (1983a), `Export Research in a Crisis', in Export Promotion: The Public and Private Sector Interaction. edited by Czinkota, M. New York: Praeger, pp129-153.

Reid, S. (1983b), `Firm Internationalisation, Transaction Costs and Strategic Choice', International Marketing Review, Volume 2, Winter, pp45-56.

(1984), `Market Expansion and Firm Internationalisation', in International Marketing Management, edited by Kaynak, E., New York: Praegar, pp197-206.

(1987), `Export Strategies, Structure and Performance: An Empirical Study of Small Italian Manufacturing Firms' in Managing Market Entry and Expansion, edited by Rosson, P., and Reid, S. (eds.), New York: Praegar, pp335-354.

Rosson, P., and Ford, D. (1980), `Stake Conflict and Performance in Export Channels', Management International Review, Volume 20, No. 4, pp31-37.

(1982), `Manufacturer-overseas Distributor Relations and Export Performance', Journal of International Business Studies, Fall, pp57-62.

Robinson, Richard C. (1978), International Business Management: A Guide to Decision-making, 2nd edition, Linsdale, IL: The Drydon Press.

Rosson, Philip J., and Reid, Stanley, D. (eds.) (1987), Managing Export Entry and Expansion, Praegar Publishers, New York.

Rosson, P. (1987), `The Overseas Distributor Method: Performance and Change in a Harsh Environment', in Managing Market Entry and Expansion, Rosson, P., and Reid, S. (eds.), Praegar Publishers, New York, pp2140.

Rothchild, D. (1983), `Surprise and the Competitive Advantage', Journal of Business Strategy, Volume 4, No. 3, pp10-18.

Terpstra, Vern. (1983), International Marketing, 3rd Edition, New York, The Dryden Press.

Sarathy, Ravi (1991), International Marketing, Fifth Edition, The Drydon Press.

Thorelli, Han (1980), `International Marketing: An Acologic View', in International Marketing Strategy, Revised Edition, Hans Thorelli and Helmut Becker, eds., New York: The Pergaman Press, pp5-20.

Turnbull, P. W. (1987), `A Challenge to the Stages Theory of the Internationalisation Process', in Managing Market Entry and Expansion, edited by Rosson, P., and Reid, S. (eds.), New York: Praegar, pp2140.

Varaldo, Riccardo (1987), `The Internationalisation of Small- and Medium-sized Italian Firms', in Managing Market Entry and Expansion, edited by Rosson, P., and Reid, S. (eds.), New York: Praegar, pp203-222.

Walters, Peter G. P., and Samiee, Saeed (1990), `A Model for Assessing Performance in Small US Exporting Firms', Entrepreneurship Theory and Practice, Winter, pp3346.

Weaver, K, Mark and Pak, Jongmoo (1990), 'Export Behaviour and Attitudes of Small- and Medium-sized Korean Manufacturing Firms, International Small Business Journal, Volume 8, No. 4, July-Sept.

Williamson, Oliver (1975), Markets and Hierarchies: Analysis and Antitrust Implications, New York: The Free Press.

(1985), The Economic Institutions of Capitalism, New York: The Free Press.
COPYRIGHT 1996 Sage Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Osborne, Kerri
Publication:International Small Business Journal
Date:Apr 1, 1996
Previous Article:Technical entrepreneurship, strategy and experience.
Next Article:Similarities and differences in UK and US franchise research data: towards a dynamic model of franchisee motivation.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters