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Companies entering markets in developing countries learn quickly that they need to work with local distributors-but those partnerships nearly always blow up in the end. Much ofthe blame lies with the multinationals themselves. They need to understand how their new partners are different from the ones at home. Seven Rules o/lnternational Distribution by David Arnold A N ESTABLISHED CORPORATION LOOKING FOR / new international markets makes a foray into an / emerging market, carefully limiting its exposure by appointing an independent local distributor. At first, sales take off, revenues grow pleasingly, and tbe entry is praised as a smart move. But after a wbile, stagnation sets in and sales plateau. Alarmed, tbe multinational’s managers try to discover wbat happened. They soon settle on wbat tbey perceive to be tbe main obstacle to sustained growtb: the local distributor that got the company off to a flying start bas run out of ideas and is now underperforming. This pattern is repeated again and again as multinationals expand into new markets in developing countries. Over time, a corporation’s executives decide tbat the distribution organization isn’t run as they would like. They rush in and make major changes, in some cases buying the local distributor or, more often, reacquiring tbe HARVARD BUSINESS REVIEW November-December 2000 Seven Rules of International Distribution distribution rights and starting their own subsidiary. In either case, it’s messy. A transition from indirect to direct sales is usually costly and disruptive. It can also create new problems that come to the surface only in the long term: executives may discover a few years later that they’ve gone too far in correcting a number of situations like this, saddling the multinational with a dense and inefficient network of national distributors. The frustrations are summed up by the CEO of a major U.S. specialty cbemical company: “In the end, we always do a better job witb our own subsidiaries: sales
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