International channels of distribution

3.4.1. Complexity of the International Channels of Distribution

A brief introduction to the nature of complexity of international business has been given in 3.2.2. The current section will focus on the complexity of the international channels of distribution. Distribution channels refer to “the set of firms and individuals that take title, or assist in transferring title, to the particular product or service as it moves from the producer to the consumer” (Kotler & McDougall, 1985:

503). Compared to domestic business, the international distribution channel is much more complex. A simplified description of the international distribution channel begins with the domestic producer, which either exports its products directly to foreign companies or sells the products through an export agent, who subsequently sells the products to importers. The importers will then sell the goods to retailers, whose customers are final users (Ball & McCulloch, 1985: 340). These channel members have competing desires, since each one wants to maximize its own profits.

To solve this problem, certain channel members must exercise leadership to manage channel conflicts.

3.4.2. Distribution Channel Power

The leader of a channel is the channel member that has the most power. In marketing, power is defined as the ability to influence the action of other distribution channel members (Beckman, Kurtz, et al, 1982: 483). French and Raven (1959:150-167) propose five forms of power: legitimate power, reward power, coercive power, expert power and referent power. Legitimate power comes from the position a person holds within an organization. Reward power refers to the power gained from the ability to give rewards, while coercive power is the power to punish. Expert power results from the power-holder’s knowledge or skills. Referent power stems from group members’

respect for or attraction to the power-holder. All five power bases can be applied to understand power differentials in international business discourse community.

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institution, is the chief power base in the international business discourse community.

Legitimate power in distribution channels mainly comes from the following factors:

business roles, the size of the company, and the type and quality of products a business organization deals with. Based on the theory of microeconomics (Mansfield, 1985), power is mainly attached to business roles – whether the interlocutors are buyers or sellers.

Every market is composed of two sides: supply and demand, as shown in Figure 3.4.2:

Figure 3.4.2. Demand relationship between supply and demand

In an idealized free-enterprise economy, the market demand curve slopes downward to the right, whereas the market supply curve slopes downward to the left. This means that the quantity of demand more often than not increases when price falls: if too many people buy the product, there will be a shortage of the product. As a result, sellers will increase the price to maximize their profits. Nevertheless, if the price is too high, fewer people are willing to pay. Consequently, the demand will decrease, which leads to price cuts. Price changes constantly according to the changes of the relationship between demand and supply. The point where the two curves intersect is called the equilibrium price, which is the price where the quantity demanded equals the quantity supplied (Mansfield, 1985: 32). When a price is higher than the equilibrium price, it will result in an oversupply that will push the price down. Once a price is lower than the equilibrium price, there will be a shortage of the product. The

Equilibrium point

Demand curve Excess supply Supply curve

Excess demand

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excess demand will push the price up. A market where demand exceeds supply is called a seller’s market, in which the sellers have more control over the buyers. A market where supply exceeds demand is called a buyer’s market, in which the buyers have more control. The assumption that buyers have more control over sellers is supported by the metaphor “The customer is king”, in which the customer is compared to a monarch, and the seller is the king’s servant. The metaphor vividly pictures the power differentials between buyers and sellers.

The products discussed in the corpora are pharmaceuticals, including both pharmaceutical ingredients and finished medicines. In the international market of pharmaceutical ingredients, the amount of supply is typically higher than that of demand. Hence, the international market of pharmaceutical ingredients is typically a buyer’s market. As such, buyers are empowered with more control over sellers, and

“the sellers, on the other hand, accept the buyer’s control over the situation” (Connor, 1999: 125). Since legitimate power is attached to roles rather than persons, power in this study shifts with role. Connor (1999: 125) observes that brokers use more polite and correct language when assuming the seller role than when assuming the buyer role. However, there might be exceptions in the market of finished medicines. It will be shown in Section 3.5.1 that novel drugs are special commodities able to treat diseases that ordinary medicines cannot; therefore, they can offer patients a greater chance to survive. Such unique benefits offer great profits to both manufacturers and their agents. To gain the right to be the agent of novel drug manufacturers means becoming a millionaire overnight, which empowers sellers with more control over buyers. This blurs the power distinctions between buyers and sellers.

Based on French and Raven’s framework, expert power is adopted in this study as the power acquired in developing and marketing novel drugs and possessing necessary business skills. Manufacturers possessing expert power are likely to be distribution channel leaders. Reward power is the power to offer orders at favorable prices, to grant agency rights, etc. Coercive power is the ability to threaten economic punishment, for example, to cancel future orders. Referent power is modified in the context of international business as the ability to bring the hearer to compliance.

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Personal factors such as the speaker’s position in his/her own company, age, gender, ethnic identity, nationality, and situational factors may all assert influence on the addressee.