The International Entrepreneur – Overseas Distributors: Strategic Partners or Big Mistake?
Many young internationalizing companies ask: should we use local distributors in overseas markets or enter markets directly? As with most questions in international business, the answer is… it depends. Here are some guidelines to making this key strategic decision.
Knowing the Local Market
One of the benefits of using a local distributor to sell your products is that they know the local market. They know the language, government regulations, local contacts, business etiquette, and logistics. But this knowledge comes at a cost. Distributors tend to take a large percentage of the profit, which normally covers their sales and marketing costs as well as the value-added local market knowledge. One way to get the local market knowledge and connections without paying to go through distributors is to consider hiring a qualified immigrant from a key market such as Brazil or India who can work at your headquarters office and still make the necessary connections for your company.
Protecting Company Intellectual Property
This is a major concern for my main client base: software companies. And rightly so… If you have key IP to protect, then choose your distributors very wisely. Many a tech company has lost key IP to an unscrupulous distributor-turned-competitor. There are various ways to handle this as a young, growing company. First, hold back a key piece of IP that is provided solely by your company and then given directly to clients. And second, assume your IP is going to be stolen anyway by someone and prepare by always spurring your developers on to be one step ahead of the copy cats.
How Important is Your Partnership?
I talk with many companies who tell me how disappointed they are in their overseas distributors. Sales seem to barely trickle in, so the market demand must be low. This may be true, but just as likely the company is working with the wrong distributor. A common mistake for smaller companies is using a distributor that is very large. How much attention will your products get if a distributor can earn more money selling a more-established brand? Also important – does the distributor represent any of your competitors? Instead, look for a distributor with not only expertise in your industry, but the motivation to want to put your products forward aggressively into the market. In addition to a good fit, be sure to motivate your distributor through financial incentives, non-financial incentives, and a good solid relationship with your company’s leaders.
For more information about partnerships, please feel free to contact me. My professional mission is to help entrepreneurial companies to become more globally competitive.
Please feel free to comment with questions or stories of your own experiences.
And for those of you following my Cultural Tips Series, next week we will return with an interview on Canada, followed by India the next week.