Strategic Distribution Potentiality Toward Firm’s Success : SMEs Food Industries in the North Region of Thailand
Dr. Supathanish Termsnguanwong,DBA [email protected]
ABSTRACT
This study proposes a distribution channel strategy model based on the notion that distribution channel strategy is the basic determinant of distribution channel performance which may lead to firms’ success. Its major objective is to assist manufacturers in making effective decision on distribution channel strategy.
The proposed model integrates two strategic components: a) distribution channel selection—the manufacturer’s choice of distribution intensity, channel location characteristics, channel control and b) distribution channel management—the channel service quality as to product and as to people. The model proposes how the two strategic components affect distribution channel performances that finally lead to firm’s success.
Key word : Strategic , Distribution Potentiality, Firm’s Success, SMEs Food Industrial, Thailand
INTRODUCTION
Background of the study
In the past, most companies ignored the distribution channels as an important part of their marketing strategy. At present, intensive competition in global markets stimulate firms to place more emphasis on their distribution channel strategy to increase firms’ success.
The distribution strategy is considered as an important strategic weapon to achieve and maintain competitive strength (Magnet, 1992; Porter, 1991). It is one of the key components of the marketing mix which will become an even more important part in the future (Cravens, 1994). The reason is that products can now be copied within a short period of time. For example, designs of fashion products from well-known brand companies can be copied from the catwalk and put on the street shop within a day. Price can be undercut within minutes. But from the standpoint of developing competitive advantage that has long- term viability, distribution channel strategy (specially the one that focuses on building a strong relationship between manufacturer and its channel members) is a key marketing mix that cannot be duplicated quickly with technology, with a clever idea, or with factors such as product, price, and promotional strategies (Rosenbloom, 1995). In other words, the superior performance of a distribution channel strategy is likely to result from how firms select and manage their distribution channel, in addition to the capabilities of people in their organizations with various channel members and their inclination to deliver superior performance aimed at achieving mutually beneficial goals.
As such, distribution channel strategy is at the heart of competition (Porter, 1985) and becomes an essential area of marketing strategy.
Most previous researches indicate that location is an important factor to which the firm should pay attention (Brown, 1993; Ghosh and McLafferty, 1987; Yoo, Donthu, and Lee, 2000). Accordingly, the firm should be interested in location characteristics relevant to its distribution channel strategy.
Channel control is an important topic in distribution channel strategy. Most evidences show that both industrial and consumer goods markets want control distribution channels for better execution of their marketing strategies.
As such, distribution channel strategy is at the heart of competition (Porter, 1985) and becomes an essential area of marketing strategy to attain success for SME’s in Northern Thailand, hence this study.
Statement of the Problem
This study attempted to examine the distribution channel strategy as a source of advantage that would lead to a position advantage and finally to firm’s success.
- What is the level of distribution channel selection and management in terms of distribution intensity, channel location characteristics, channel control and channel service quality ?
- What is the level of the firm’s success in terms of external outcome and internal outcome enjoyed by the SMEs ?
- What model can be formulated to improve distribution potentiality of SMEs that would lead to firm’s success ?
LITERATURE REVIEWS
THAILAND SMEs
In the past, some enterprises, such as Thai SMEs have not had enough budget for advertising and developing their product packages. It affects the volume of product sold, which is not increasing. Now the Thai government is focusing on and supporting these kinds of businesses and giving them help for setting up exibitions in various market places. This pattern wastes time and travelling costs are high for customers. Also this selling only focuses on the specific customers. The sales volume is also restricted. They are also highly competitive with large enterprises and other Thai SMEs.
In order to encourage Thai SMEs to make use of this marketing channel to increase their sales volume; Marketing and Online Shop System has been produced. It will not only encourage Thai SMEs but also put customers at ease when shopping online for Thai SMEs products.
Small and Medium-Size Enterprises (SME) are the machines that drive the economic circle. Not only in Thailand, but in every countries all over the world. It is because SMEs have the main role in distributing their goods in instant packages. In addition, they are the manufacturer’s facilitator receiving the raw material to supply to the major enterprises. Big industry achieves success by relying upon SMEs. They are the relative linkages as a cluster.
SMEs in Thailand are about 96 present of all kinds of industries. Therefore, SME entrepreneurs are very important to economic growth and are the place to accumulate working experience as SMEs have the low costs and the main place to hire labour in the country. SMEs in this study includes manufacturing wholesale, retail and service.
SMEs have been classified according to the number of employers in each enterprise, and real property. Small business are classified as employing not more than 50 people or having real property worth not more than 20 million baht. While the middle sized enterprises have more than 50 but not exceeding 200 employers or having real property worth between 20 to 100 million baht.
At the time of Asian economic crisis,1997, many enterprises closed themselves or downsized the business to survive. The way to survive for those unemployed was opening SME businesses with support from Thai government in all features such as introduction, creating new entrepreneurs, financial support and providing the market. In 2000 the Thai government passed a law to promote SMEs. The main idea of the law is promoting, supporting and developing the capacity of SMEs. In addition, the government set up institutions related to SME development, for example, the SME Development Institute. In addition, the finance institution support SMEs both by lending and by giving suggestions for the entrepreneur to survive. This applies to both commercial and government banks.
To promote SMEs means to strengthen the economic growth of the country and means to increase competitive capacity. The countries where SMEs originally achieved their goal were Taiwan, Japan and Germany. Those countries received coordination from the government and private sectors. Therefore, to systematically increase Thai SMEs potential is very important, they must face many barriers such as marketing, a squeeze on money to invest, lack of labor, the limitations of production technology, management limitations and government accessibility.
A new entrepreneur in an SME should study more about the product, market, price and distribution. SME entrepreneurs have to know the main product, its composition or product details, including the advantages and disadvantages of the product. Then they have to classify the products into categories, for example, product for consumption or product for industry. Packaging is one of the important things to do business nowadays as there is pretty much competition and so many entrepreneur designs packaging that meet the customer’s needs, he or she can attract customers to buy more products. Thus, entrepreneurs should not ignore this important point.
(www.smethai.net/th/dowmload/download/smes)
Distribution Channel Strategy as a Marketing Strategy
Marketing strategy is an integrated, multi-element or multi-component strategic concept guiding a firm’s marketing plan toward a specific product or product line during a given time period (Stasch et al., 1999). The elements or components of the strategic concept should include all or most of the following: the market, competitors, other environmental market factors, product, price, promotion, and distribution.
Cravens (1994) suggests that developing a marketing mix (product, price, promotion, and distribution strategies) to meet the demands of the firm’s target markets better than that of the competitors is the heart of modern marketing management. The manager should develop the right combination of the four P’s to provide and maintain the desired level of target market satisfaction. For this reason, the role of distribution must be considered along with product, price, and promotion.
Bandopadhyay (2001) posits propositions regarding the creation of an appropriate marketing mix (a combination of product, promotion, pricing, and distributionstrategies) to effectively reach each target market. The study focuses on competitive strategies for internet market and suggested firms to consider re-intermediation over disintermediation strategy. Firms should make use of retailers who will physically distribute products that are featured on the internet. In addition, firms should emphasize developing partnerships with electronic facilitating agencies who can help reduce the customers’ search and transactional efforts.
Yoo, Donthu, Lee (2000) explores the relationships between selected marketing mix elements and the creation of brand equity. The study proposes a conceptual framework where marketing elements are related to the dimensions of brand equity. Marketing mix elements are investigated by using consumers’ perceptions of price, store image, distribution intensity, advertising spending, and frequency of price promotions. The dimensions of brand equity are examined by perceived quality, brand loyalty, and brand associations combined with brand awareness. The empirical test, using a structural equation model, supports the research hypotheses. The results show that frequent price promotions, such as price seals, are related to low brand equity whereas high advertising spending, high price, good store image, and high distribution intensity are related to high brand equity.
Sherwood and Nordstrom (1990) offer an integrative framework for presenting physical distribution activities as a tactic to achieving desire level of customer service and ultimately customer satisfaction. The study provides the connection which establishes physical distribution as an important strategic element in the firm’s marketing mix. Additionally, it shows how other marketing mixes are affected by physical distribution considerations.
Integrated Framework of Distribution Channel Design and Distribution Channel Management into Distribution Channel Strategy
According to previous studies, the distribution channel strategy literature can be divided into design and management aspects (Rangan, Menezes, and Maier, 1992). The channel design (e.g., Williamson, 1985) examines the organization’s channel system and the rationale for having channel intermediaries (sales force, agents, distributors, wholesalers, and retailers); whereas channel management explores how channel systems can be handled. The central piece of these studies involves conflict and cooperation (Anderson and Narus, 1990; Stern and Brown, 1969), including how manufacturers and distributors use their power base (Beier and Stern, 1969; Gaski, 1984) to achieve their business objectives (Frazier and Rody, 1991).
McCalley (1992) proposes the concepts of marketing channel which is separated into two parts: 1) the channel distribution structure to ensure manufacturers have appropriate channels to distribute their products consistent with their marketing objectives, and 2) the physical distribution structure to take care of efficiently moving the desired products from the manufacturers to the consumers.
Stren, El-Ansary, and Coughlan (1996) state that distribution channel strategy concerns the firm’s decision regarding the type of channel organization to use, the intensity of distribution appropriate for the product or service, and the extent of channel management performed by the firm.
RESEARCH METHODOLOGY
The research instrument used a self-administered survey questionnaire which was mailed to the respondents. The mailing list were those Thai food manufacturers in 2006 obtained from Ministry of Commerce that have the most relevant and updated database. The list represented a group of the desired general population. Respondents were executives who were involved in the distribution and policy administration, who were requested to complete and return the questionnaire by mail during the specified sampling period. Firm sizes were classified according to their employees registered in the Ministry of Commerce.
The questionnaire is composed of four parts based on the statements of the problem, in order to gather answers to questions posted earlier, which were the following :
Part I is the profile of the target food companies,
Part II are questions to gather information about the level of distribution channel selection in terms of distribution intensity, channel location characteristics and channel control and distribution channel management in terms of channel service quality as to product and people.
Part III is the extent of channel performance of the companies in terms of effectiveness and efficiency possessed by the companies.
Lastly, Part IV touched on the level of the firm’s success in terms of external outcome to cover market share, profitability, sales and also in terms of internal outcome to cover satisfaction and loyalty.
For validity test, the researcher conducted face and content validities. The face validity was done by selecting three experts in the areas of research, instrument preparation, and business. They checked the research instrument as to the appropriateness of the terms/vocabulary used against the kind of respondents, data gathered and the adequacy of the items per aspect.
In reliability test, the researcher administered the questionnaire to 20 managers from different food manufacturing firms. The researcher integrated all the suggestions and reproduced the instrument based on the number of respondents.
FINDINGS
It is expected that channel selection and management indicators in terms of distribution intensity, channel location characteristics, channel control, channel service quality as to product and people may lead to firm’s success and also channel performance factors in terms of effectiveness and efficiency. But since it was observed that channel selection and management factors and only efficiency in channel performance which are significantly related to external outcome, it is proposed that food manufacturing firms should study further and find out what areas should be considered in identifying as well as in zeroing in to their target market so that they can successfully attain their expected goals, and where they can provide quality service as to product and people, and at the same time being flexible from time to time. Also, these food manufacturing firms should look into other factors that could enhance customer satisfaction and loyalty. (Arrows with broken lines refer to areas that should be enhanced in order to be connected fully to the target point, and once completely connected, it now becomes the desired model ).
Location characteristics, channel control, channel service quality as to product and channel service quality as to people are significantly related to external outcome except distribution intensity. In totality, the sample multiple correlation coefficient is .709, indicating that 50.3 % of the variance of the external outcome can be accounted for by the linear combination of the distribution channel selection and management.
Service quality as to product and channel service quality as to people are significantly related to external outcome except distribution intensity.
Results of the study indicate that channel selection and management has no significant relationships with the internal outcome in business. This could be attributable to the fact that in this globalized community, firms must adapt to the rapid change in market conditions generated by evolving consumer preferences, food safety requirements and intense competitive pressure. In response to these, food manufacturing firms should seek to examine and identify some of the emerging challenges faced by the industry in their region. Their future competitiveness, profitability and sustainability will be determined largely by the effectiveness of their responses to these challenges (European Monitoring Center on Change, 2006)
In addition, SMEs should provide criteria for faster decision making. According to important factors in distribution channel strategy findings in this study, the managers should do fast decision making in changing contract conditions concerning distribution system upon demand from target market.
Another one is to provide a guideline for management in strengthening distribution channel strategy. The overall finding offer strong empirical support for the intuitive notion that improving distribution channel selection and management strategies can increase external outcomes. The findings demonstrate the importance of each strategy that can help firm make faster decisions on distribution channel selection and management strategy in the right directions, including striving to meet management’s desired performance level, clearly convincing how to select and manage their channel effectively and efficiently in channel performance.
Basing on the result of the study, the model that could be formulated to improve the distribution potentials of SMEs that can lead to firm’s success is the following :
CONCLUSIONS
The largest group of food business companies in the northern of Thailand is beverage food company, followed by pickle food group. Many of the food companies are quite new in their business, usually 10 years & below. More of the food companies in the northern of Thailand are small and medium enterprises as indicated by their number of employees and capitalization. These food companies have very good distribution strategies as to distribution intensity, channel control, channel service quality in terms of product and people, which all got a descriptive equivalent of very high except channel location characteristics with equivalent of high only. Channel service quality as to people have significant differences to all the other four indicators.
Food industries concerned are very willing to change their contract conditions just to meet whatever changes that are needed to meet demands of the present time just to sustain their business. Firms show willingness to effect some changes to improve efficiency but have to save to replace for the expenses incurred for those changes for more efficient results. The extent of channel performance of the firms in Northern Thailand in terms of effectiveness and efficiency is very high. There is a significant difference on the extent of channel performance of the firms in terms of effectiveness and efficiency. Efficiency is much higher ( in terms of mean values) than effectiveness. External outcome and internal outcome of the food industries in Northern Thailand are all very high, in terms of market share, profitability and sales, and satisfaction and loyalty respectively. There is a significant difference between external outcome and internal outcome. Food industries appreciate more the internal outcome of the business rather than the external outcome.
Except distribution intensity, location characteristics, channel control, channel service quality as to product and channel service quality as to people are significantly relate external outcome. Distribution channel selection and management do not have significant relationship with firm’s success in terms of internal outcome.There is no significant relationship between effectiveness and firm’s success in terms of external outcome, but efficiency had a significant relationship with firm’s success in terms of external outcome of the business. Channel performance in terms of effectiveness and efficiency have no significant relationship with firm’s success in terms of internal outcome.
