Review on three journals

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Multiple Channel Strategies in the European Personal Computer Industry By: Mika Gabrielsson; V. H. Manek Kirpalani; Reijo Luostarinen. In: Journal of International Marketing. 10(3):73-95; American Marketing Association, 2002. Language: English. Abstract: The authors examine sales channel strategies for international expansion as a means of compensating for constantly decreasing unit prices and margins in the personal computer (PC) industry operation in the European Union market. The authors describe and analyze the development from single (direct or indirect) to multiple (dual or hybrid) sales channel strategy for international expansion on the basis of four theoretical approaches. The methodology used is a qualitative research strategy. The authors conduct a longitudinal multiple case study consisting of 20 top management interviews related to four cases. They examine the development of the sales channel strategies of selected large companies in the European PC business. Multiple sales channels, especially the hybrid ones, are an optimal solution for expanding sales volumes. The results contribute to the relatively underresearched area of multiple channels, and the managerial implications drawn should be helpful not only to PC companies but also to other firms, such as "born globals." (AN: edsjsr.25048900)

JSTOR Journals

Multiple Channel Strategies in the European Personal Computer Industry

ABSTRACT The authors examine sales channel strategies for international expansion as a means of compensating for constantly decreasing unit prices and margins in the personal computer (PC) industry operation in the European Union market. The authors describe and analyze the development from single (direct or indirect) to multiple (dual or hybrid) sales channel strategy for international expansion on the basis of four theoretical approaches. The methodology used is a qualitative research strategy. The authors conduct a longitudinal multiple case study consisting of 20 top management interviews related to four cases. They examine the development of the sales channel strategies of selected large companies in the European PC business. Multiple sales channels, especially the hybrid ones, are an optimal solution for expanding sales volumes. The results contribute to the relatively underresearched area of multiple channels, and the managerial implications drawn should be helpful not only to PC companies but also to other firms, such as "born globals."

The personal computer (PC) industry has a fiercely dynamic market characterized by intense speed of competition and consolidation, high scale and learning advantages, globalization and cost pressures, and shortening life cycles for both technology and products. In 1999, the leading five PC companies in Europe handled more than 50% of the total PC units versus only 30% in 1990 (International Data Corporation [IDC] 2000). In 2000, IBM had lost the leading position that it had in the beginning of the 1990s and slipped to fourth, as Compaq, Fujitsu Siemens, and Dell, in that order, bypassed it, whereas Hewlett-Packard held the same fifth position through the decade. Moore's law, which initially stated that technological development will enable the PC's central processing unit to double in speed every second year for the same price (Dhebar 1996, p. 38), has been revised to incorporate even faster development. Prices of PCs were found to decrease annually by some 20% to 40% in the 1980s, and the decline further intensified in the 1990s. Product life cycles lasted

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approximately one year in the mid-1980s but had shrunk to some three months by 1999 (Curry and Kenney 1999, pp. 8-12). This market situation has led to constantly decreasing unit prices and margins in the PC industry. As a solution to this problem, it is extremely important for PC companies to increase their sales constantly to benefit from scale economies and compensate for lower margins.

In this article, we examine the international expansion of sales channels in the European Union (EU) market as a partial solution to this problem. More specifically, we formulate the research question to study the problem as follows: What are the alternative sales channel strategies for a PC company to expand its sales volumes in Western Europe, and how and why have these strategies developed over time? Naturally, PC companies will also consider several other partial solutions to overcome the profitability decline--for example, speeding up the introduction of new product models to benefit from higher prices in the early phases of the product life cycles or improving their competitiveness in the high-end product range. In addition, both the operation strategy and the market strategy could offer partial solutions to the research problem. The rationalization of production and location of production facilities can indeed increase the sales and profitability of the PC companies. Also, the expansion to developing markets, such as the Far East, would be one means of increasing sales volumes. As stated previously, we recognized these other partial solutions to the research problem but did not study them in this research. The study does not deal with the impact of e-commerce, because that impact is still not clear. We concentrate on the strategic choice of other sales channels and therefore discuss e-commerce only in passing along with other channels and in the concluding remarks. The findings and analysis of data in this sector should prove useful to other PC makers with lower market shares and to academics who want to research the impact of the strategic choice of sales channels in other industries that involve consumer durables.

The development of sales channels in the PC industry has been turbulent since the beginning of the 1980s, when the leading companies started to reorganize their single channels to form new, multiple channels. Earlier PC companies had used a single either direct or indirect channel (Moriarty and Moran 1990, p. 146). Increasing e-commerce will add one more alternative to the channels. In future research efforts, we intend to research the impact of e-commerce on channel strategies. Nevertheless, these changes in the industry raise the importance of channel strategy research in general. The previous literature has examined channel choice from a single channel approach, whereas multiple channels as a means of international expansion have been underresearched and form a research gap. Furthermore, empirical studies with a longitudinal approach on channels in transition are also scarce (see, e.g., Frazier 1990, pp. 256-71). Neither has the international business (IB) literature studied and explained multiple channels explicitly, though their existence has been recognized (Luostarinen 1979; Luostarinen and Welch 1990, pp. 22-24). This article therefore has the following objectives: ( 1) to describe, on the basis of existing theoretical approaches, the impact of entry and penetration (marketing) operation modes on different sales channel strategy alternatives and their development for international expansion; ( 2) to describe and analyze the development of sales channel strategies in the PC industry in Europe through the empirical data collected; and ( 3) to present a framework describing channel choice and development.

SALES CHANNEL STRATEGIES The IB and marketing literature has developed distinct definitions of sales channel structures that, however, can easily give rise to confusion. Many dimensions for these definitions, such as the degree of directness and ownership of the channel, the variety and number of the channels, and the degree of selectivity of the channel, are important in both research streams. However, the IB literature views these dimensions from the foreign market entry mode (Kirpalani, Reid, and Rosson 1987; Luostarinen and Welch 1990) and internationalization stage perspective (Luostarinen 1970, 1979, 1994); the marketing literature views it from a strategic perspective

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as a means to reach the end user within the domestic market or in a single-market context, such as the EU (Hardy and Magrath 1988, pp. 14-22).

The target country internationalization process model (Luostarinen 1970, 1979, p. 110) and the knowledge commitment establishment chain model (Johanson and Vahlne 1977, p. 23) have been used in prior research that deals with entry strategies to foreign markets.( n1) The latter presents an establishment pattern by which companies start with no regular export, sell through an agent, then sell through a sales subsidiary, and finally establish a production subsidiary (Johanson and Vahlne 1977, p. 25). In contrast, the internationalization process model recognizes two main groups of marketing operations, which form a base for channel strategies:

1. Export operations, part of the nondirect investment marketing operation modes (NIMOS): indirect export mode, direct export mode, and own export mode (Luostarinen 1970, p. 13; see also Luostarinen 1979; Luostarinen and Welch 1990), and

2. Sales and marketing subsidiary operations, part of the direct investment marketing operation modes (DIMOS) (Luostarinen 1970, 1979; Luostarinen and Welch 1990, pp. 166-69).

In the internationalization process approach, the export and DIMOS are regarded as alternative entry modes into the target country markets. They are followed by direct investment production operations (Luostarinen 1970, 1979). The explanatory logic of movement from NIMOS to DIMOS is detailed subsequently.

According to the marketing literature (Stern, El-Ansary, and Brown 1989, p. 5), "Marketing channels can be viewed as sets of interdependent organizations involved in the process of making a product or service available for use or consumption" within a target country. The choice of channel is viewed from the strategic perspective of optimal effectiveness and efficiency in reaching the end customer. "Not only do marketing channels satisfy demand..., they also stimulate demand by the promotional activities of the units composing them" (Stern, El-Ansary, and Brown 1989, p. 5). Furthermore, there are two main sales channel alternatives (see, e.g., Hardy and Magrath 1988, pp. 15-22): ( 1) the indirect sales channel and ( 2) the direct sales channel.

The indirect sales channel means that the independent channel intermediaries located in the target market are used. Such a channel can have either a first-tier structure or a second-tier structure. The first tier refers to the use of resellers or retailers selling directly to end customers, whereas the second tier refers to the existence of an additional level, the distributors, between the sales subsidiary and the resellers or retailers. Naturally, in some cases, the channel may be even longer than this, with a third tier of importers or agents. In a direct sales channel, the producer sells directly to end customers by using its own sales force (Hardy and Magrath 1988, pp. 14-22). The relations between marketing operation modes and sales channel international strategies are illustrated in Figure 1.

The mainstream internationalization path of companies has been to internationalize their sales and marketing activities first, through NIMOS and only second through DIMOS (Luostarinen 1979). In the first NIMOS stage, the company can choose among three main entry mode alternatives: indirect exporting, direct exporting, and its own exporting. The indirect export mode exists when another company located in the home market carries out export activities on its behalf. In the direct exporting mode, the producing firm takes care of exporting activities directly with the first intermediary located in a target country (Luostarinen and Welch 1990, pp. 21- 25). When the firm uses its own export mode, there is no domestic or foreign intermediary between the producer and the end customer. The producer's own export personnel is involved in sales activities to serve end customers; e-sales or mail order may be used (Luostarinen and Welch 1990, p. 27).

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As the operation expands and becomes more experienced in foreign markets, thereby reducing the risk and uncertainty, the producer may decide to establish a sales or marketing subsidiary to serve the market better (Luostarinen 1979, p. 188). If the producer takes care of selling to the end customer through the sales or marketing subsidiary, the sales channel is direct. If the producer has a subsidiary carrying out the role of a distributor but uses resellers or retailers for selling to the end customer, the channel is indirect. The sales channel strategy may therefore be either direct or indirect.

In the PC industry, multiple channels are sometimes used. One such structure is a dual sales channel in which both direct and indirect sales channels are used simultaneously (Hardy and Magrath 1988, pp. 15-22; see Figure 2).

In addition to the sales channel strategy, the PC producer also must consider a great variety of channel intermediaries at each channel level. The vocabulary used in this study in respect to the channel members is specific to the PC industry. Channel intermediaries can be classified into distributors, resellers, and retailers. By definition, distributors usually do not sell directly to end customers but use either resellers or retailers as intermediaries. Resellers can be further divided into dealer chains (or corporate resellers); local dealers; indirect fax, telephone, or Internet resellers; and value-added resellers, which add software and services to the PCs. The retail stores can be further divided into PC superstores, PC stores, and general merchandisers. The resellers sell to industrial organizations, whereas retailers sell to consumers through retail outlets. However, because the definitions of intermediary types vary greatly from industry to industry and even from company to company, it is more important for a producer to consider the functions a particular intermediary can perform than to pay attention to names per se. The sales channels target a variety of customers. In this study, they are divided into two broad groups: consumers, which includes people who buy the PCs from a personal budget, and business organizations from different fields of industry and services.

In addition to sales activities, the marketing subsidiary is also defined to be engaged in sales promotion activities, usually targeting end customers and/or channel intermediaries in addition to performing other tasks such as intelligence and service (Luostarinen and Welch 1990, pp. 166-68).

In connection with a marketing subsidiary, any of the previously discussed direct, indirect, or dual channels may be used, and a fourth alternative, a hybrid sales channel, may be selected. In a hybrid sales channel, the marketing functions are shared by the producer and the channel intermediary; the former usually handles promotion and customer-generation activities, whereas the intermediary is in charge of sales and distribution, as is shown schematically in Figure 2. The distinctive difference between the two multiple strategies, in this study, is that the dual channel strategy is an adversarial channel strategy, whereas the hybrid channel strategy is based more on cooperation and partnership.

THEORETICAL REVIEW In this article, we review four theoretical approaches for explaining the sales channel strategy choice and development, namely, ( 1) the internationalization process and multinational corporation (MNC) management orientation stages, ( 2) the economic structure of the sales channel (transaction cost analysis [TCA]), ( 3) long- term relations, and ( 4) product-technology life cycles. These approaches have been selected for their ability to explain dynamism, longitudinal development, and transitions. (For a summary of the theories and applications explaining the sales channel structure decision, see Table 1.) Other approaches considered but not selected were the original microeconomic approaches (e.g., Bucklin 1966), because we believe that TCA captures elements from both microeconomic and sociopolitical approaches and is therefore appropriate because of its more precise explanatory power. We also considered the population ecology approach (e.g., Levins 1962),

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agency theory (e.g., Eisenhardt 1989b), and the resource-based approach (e.g., Barney 1991). The population ecology view is too limited in research scope. The agency theory's focus on the principal-agency contract seems less suitable than TCA, because it ignores other environmental factors that impinge directly on channel choice (Eisenhardt 1989b, p. 64). The resource-based view focuses excessively on the internal resources of the company and is therefore not as suited for analysis of channel systems as are the selected theories.

The internationalization process literature focuses on explaining the outward pattern of stages companies follow as they gradually proceed toward more demanding products, operations, and markets on both the country level (Luostarinen 1970, 1994; see also Johanson and Vahlne 1977 and a review of other early models by Leonidou and Katsikeas 1996) and the company level (Luostarinen 1979). In addition to the outward process, companies have been found to follow a holistic process of internationalization, whereby the first step is the domestic stage, followed by the inward stage, then the outward stage, and finally the cooperative stage of internationalization (Luostarinen 1994). Thus, each producer has an individual product, operations, and market posture, reflecting the degree of internationalization (see, e.g., Luostarinen and Welch 1990, p. 257) that affects the sales channel selection. The underlying rationale for the internationalization pattern is the lateral rigid behavior of the decision makers in the firms. Firms are rigid laterally in taking steps into new directions, beyond their present knowledge and earlier experience, but they are elastic forward, in doing what they have done earlier. This can be overcome through the organizational learning process (Luostarinen 1979). Likewise, Johanson and Vahlne's (1977, p. 26) model of knowledge development suggests that market knowledge can be increased through commitments to and activities in foreign markets. We also suggest that this rationale applies to sales channel selections on the sales or marketing subsidiary level. Therefore, for example, we propose that the producer's positive experience of a particular channel strategy either in the home country or in other foreign markets increases the probability of weight being given to the choice of a similar type of channel strategy for a new product entry. We therefore expect the internationalization process to explain the choice of channel structure in the entry and penetration stage.( n2)

The MNC management orientation stage literature (Bartlett and Ghoshal 1989; Doz 1986; Hedlund 1985; Heenan and Perlmutter 1979) centers on the global integration/local responsiveness dilemma. Accordingly, an MNC's organizational structure varies depending on whether it is in an ethnocentric, polycentric, regiocentric, geocentric,( n3) or more advanced organizational (multifocal/heterarchical/transnational)( n4) stage of development.

The PC companies are expected to select a single sales channel in the ethnocentric stage, minimizing risks and following the one used in the home country or already experienced in other countries. Likewise, a single sales channel strategy will be used in regiocentric or geocentric stages because of the integration advantages achieved through standardization of the channel strategies. Furthermore, the polycentric stage is expected to result in a dual sales channel strategy because the subsidiaries probably have more freedom to select the appropriate sales channel on the basis of the need for local adaptation on the country and the customer segment level. Finally, hybrid channels are expected to suit the heterarchical or other advanced MNC structures, because in these advanced MNC organizations, production and marketing functions are dispersed into several units, assets are distributed throughout the company, subsidiaries have differentiated roles, and knowledge is accumulated in different parts of the organization. Also, coalitions with other companies become more important as the flexibility of the MNC's boundaries increases. In conclusion, the MNC management orientation stage approach is expected to best explain the horizontal composition of the channel structure and the decision to use single, dual, or hybrid channels.

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The objective of the sales channel economic structure literature is to explain the channel selection on the basis of cost and efficiency considerations. One of the most common approaches is TCA, based on the early work of Williamson (1985), because it suggests a level of vertical integration (market or hierarchical control) based on the efficiency of transactions. Because it is difficult to measure such costs, we use the following proxies suggested by Williamson and other TCA researchers: asset specificity, external uncertainty, internal uncertainty, and transaction volume (size x frequency). The underlying rationale of TCA is based on both economic and sociopolitical considerations. One of the main conclusions that can be drawn is that direct sales channels, especially when the asset specificity is high, make the most sense when the transaction size is large. Furthermore, TCA suggests that multiple sales channels are optimal for increasing the sales volume in the case of highly diversified markets because of economies of scale and scope in handling a large number of transactions and for managing the external uncertainty created by such diversity. However, TCA's main power is in its ability to explain the choice of degree of vertical channel structure integration.

The primary objective of the long-term channel relationship literature is to explain the development of the relationship over time (Dwyer, Schurr, and Oh 1987). It is argued that the channel relationship can lead to either partnership advantages (Sethuraman, Anderson, and Narus 1988) or channel conflicts (Moriarty and Moran 1990).( n5) This is moderated by several relationship variables, namely, power, trust, and commitment (see, e.g., Dwyer, Schurr, and Oh 1987, pp. 18-19).( n6) We focus on the influence channel relationships may have on channel selection in comparison with the current channel relation and alternatives. We argue that channel relationships are especially useful in explaining the selection among multiple channels (dual, hybrid). Hybrid channels would be selected because partnership advantages achieved through trustworthy and committed relationships are important when customers are served in cooperation between the producer's marketing organization and channel members. Dual channels decrease trust because the producer is competing directly with the channel members for customers; therefore, dual channels are selected when the relative power of the PC manufacturer is strong and channel conflicts can thereby be overcome.

The objective of the product-technology life cycle model is to describe the stages through which a product- technology passes (see, e.g., Moore 1991). The question addressed is which channels are the best alternatives for targeting customers in a particular product-technology life cycle stage. The main suggestion of this theory seems to be that in the introduction stage (innovators and early adopters), firms use single (direct sales representatives or indirect specialized) channels to satisfy the heavy customer support needs; in the growth stage (spreading to early majority customers), firms use dual channels to provide availability to all customer groups; and in the maturity stage (late majority market), firms use multiple (dual, hybrid) channels to service the customers, and interest shifts from value-added services to low price. Finally, in the decline stage (laggards), firms use hybrid or direct (marketing) channels because low-cost channels become most important (Lele 1986; Moore 1991).

METHODOLOGY We examined the choice and development of sales channel strategy in the PC industry, which has been turbulent since the beginning of the 1980s when the leading companies started to reorganize their channel activities toward multiple channels. These were expected to, and did, become dominant in the 1990s (Moriarty and Moran 1990, p. 146). We selected the multiple-case study approach, based on longitudinal analysis of four PC companies. The case methodology has a distinct advantage over other research methods because its target is to explain and deal with complex issues. Furthermore, the researcher has no control over behavioral events (experimenting with strategies is not possible) (Yin 1989, pp. 17-20). Because the PC industry is relatively oligopolistic (the ten largest firms account for 70% of the market), a case study seems more appropriate than a survey. We selected the case companies so that we could cover different channel structures

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as widely as possible. The time period under investigation is from 1982 to 1997 in regard to direct interviews, but the investigations through literature research have continued until the present.

The process of theory building from case study research depicted by Eisenhardt (1989a, p. 533) was followed in this study. Also, Yin's (1989, pp. 113-15) explanation-building approach, especially in case selection and analysis, resembles the methodology used in this study. In brief, the data-gathering and analysis process used in this study may be divided into the following steps, presented by Eisenhardt (1989a, p. 533).

First, in the getting started phase, specifying as precisely as possible the research questions and, if possible, building in prior constructs is important. Therefore, this study includes prior defined research questions and several identified prior constructs related to factors of channel strategy based on a literature review. Yin (1989, pp. 30-31) depicts a process in which initial theoretical (working) propositions are compared with empirical case study evidence and revised accordingly, thus acting as a link between theory and empirical data. In this study, the working propositions were based on the theoretical review of the four theoretical approaches presented previously, which are not presented here for space economy. The working propositions were then used for empirical testing and further developed into the propositions shown in Table 2.

Second, in the selection of cases phase, the prior specification of the population and theoretical sampling are important. In this study, the effects and the size of the industry have been eliminated by the selection of one industry, PCs, and by a focus on large PC producers. The similar case companies selected were Fujitsu ICL, IBM, and Siemens Nixdorf (SNI), whereas the dissimilar case was Compaq. In the initial stage, Dell was also selected, but it refused to participate, stating lack of time as the reason, and it was decided that Dell could be examined through secondary sources. Nevertheless, the participating firms represent most of the large companies with a greater than 30% share of the total PC sales volume in Europe (IDC 2000). Furthermore, the sampling logic has followed literal replication (cases selected so that they predict similar results) and theoretical replication logic (cases predicting contrary results to some extent but for predictable reasons) (Yin 1989, p. 53).

The third step includes the use of multiple data collection methods to triangulate the findings, combining qualitative and quantitative methods. Altogether, we implemented 20 top management interviews related to these four case companies during autumn 1996 and spring 1997, using both pre-structured and open-ended questions. As to the number of case companies, four has been regarded as enough for this type of study by leading researchers such as Eisenhardt (1989a) and Yin (1989). The people interviewed ranged from chief executive officers to sales or marketing directors. We emphasized interviewing experienced managers who had been in the company for a long period; literature has referred to these as "key informants" (Yin 1989, p. 41). If some of the people interviewed had a shorter history in the case company, we performed an additional interview with a person who had been working for a longer period in the company. This is justifiable case interview research methodology. In addition, recent statistics and the business press supplemented the study. This has enabled triangulation of interview data by a comparison with secondary data on sales channel structure. It has also enabled us to monitor the latest developments.

The fourth step, entering the field, combines the simultaneous collection of data and analysis with the use of flexible and opportunistic data-collection methods. This is one of the strengths qualitative research offers. The primary data collection and analysis were carried out during a two-year period (1996-97), which included continuous mirroring of gathered data and emerging theory (variables, constructs, and definitions). As stated previously, this was further complemented with secondary data. The case companies with a similar sales channel structure development (Fujitsu ICL, IBM, and SNI) are analyzed with literal replication. The other

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company (Compaq), having a different sales channel strategy development, is studied with theoretical replication. In the former, the findings are replicated across similar cases, and in the latter, the contrary results between different cases should understandably be based on theory (Yin 1989, p. 53).

The fifth step comprised sharpening of the working propositions by use of iterative tabulation of the evidence for each construct, replication logic across cases, and search evidence for the "why" behind relationships. This process began as part of the analysis process and was continued throughout the study. (For the results, see Table 2.)

Eisenhardt's (1989a, p. 533) last two steps are the use of literature as a comparison in terms of similar and conflicting findings and finally "closure" when theoretical saturation is reached.

Although we followed a sound research process, this study faces the risk of including unreliable results or invalid conclusions, as do all qualitative studies. To improve the construct validity and reliability of the data gathering, we followed three principles suggested by Yin (1989, pp. 95-103). First, we used multiple sources of evidence and triangulation of findings (see also Eisenhardt 1989a). For example, we used annual reports, internal documents, articles in newspapers or magazines, and private consulting companies' reports (Dataquest, IDC) to corroborate the findings. Second, we created a database to separate the data and the reports. Third, we maintained a chain of evidence throughout the case studies. Furthermore, to increase the internal validity (causality) and external validity (generalizability), we considered both a general strategy and a dominant mode of analysis, as proposed by Yin. As a general strategy, we analyzed the case study on the basis of the preliminary/emerging theoretical working proposals and grouping of theoretical concepts (Yin 1989, pp. 105-15). The dominant mode of analysis was explanation building, in which the final explanation and outcome are not fully stipulated at the beginning of the analysis. Therefore, we examined the case study evidence, revised theoretical working propositions, and examined the evidence again (Yin 1989, pp. 113-15).

DEVELOPMENT OF SALES CHANNELS The sales channel structure of Fujitsu ICL, IBM, and SNI in Europe followed a similar path in the 1980s. The sales channel used in all of the companies before the introduction of the PC products was based on a direct sales channel located in the sales subsidiary of the target country. The introduction of the PC products into the product line changed the channel structure in all of the companies from a purely single direct sales channel strategy to a dual sales channel strategy.

Compaq's sales channel strategy differs completely from the channel strategy selected by the three other case companies. Compaq used an indirect sales channel strategy, consisting of authorized dealers (resellers) selling mainly to business customers when it entered the European PC market instead of changing to a dual one. This has been largely due to its reliance on channel members being the most cost efficient but also is an effective means of expanding international sales. The dealers were expected to carry out a wide range of channel functions, which included sales, technical support, service, and demand creation. Compaq used its dealers to complement its worldwide sales coverage; in 1984, it had 330 international dealers in 13 countries worldwide and 3 foreign sales subsidiaries, all of which were located in Europe (the United Kingdom, France, and Germany). In 1990, there were 1600 European dealers located in 21 countries and 13 European sales subsidiaries. The success of Compaq's indirect sales approach was probably one of the main factors influencing similar companies to increase indirect sales and thus leading to the dual sales channel strategy.

Compaq started to develop its channel strategy in the early 1990s toward a hybrid sales channel--that is, taking control over customer-generation and sales promotion functions, whereas the intermediaries were to handle the sales and distribution--to better service its introduction of new consumer products and high-end

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server products for professional customers. These initiatives involved the establishment of a distribution center in the Netherlands and the creation of direct customer relations by setting up major account development teams in its subsidiaries and moving to open distribution. In the mid-1990s, Compaq again reshaped the channel structure by decreasing the number of channel partners served directly to develop closer relations with a smaller number of channel partners. Compaq has lately continued to add "hybrid elements" in its channel structure by setting up call and support centers in Dublin and Glasgow, for example, to provide presales advice and sales support.

The sales channel structures of Fujitsu ICL, IBM, and SNI have also followed a similar path in the 1990s, from a dual to a hybrid sales channel. All of the companies used a sales subsidiary-based, dual sales channel approach until the early 1990s. However, they decided to abandon it in the mid-1990s in favor of a more indirect distribution channel. In the case of Fujitsu ICL, the change was related to a reorganization in which PC products were demerged from ICL (a direct sales channel of Fujitsu ICL) and placed under the control of worldwide Fujitsu PC operation (which treated all indirect channels equally). Furthermore, IBM maintained control of certain channel functions, which resulted in a hybrid sales channel, and SNI and Fujitsu ICL had similar plans for maintaining control of certain channel functions. In all companies, vertical channel conflicts were the main reason for the decision to change from dual to hybrid. The channel members believed that the producer's direct sales competed with their own sales.

According to the business press, Dell uses a single channel, mainly the direct sales channel approach. Dell's direct sales approach can be divided into direct sales representatives that serve "relationship customers" (large public and corporate customers) and fax-, telephone-, and Internet-based channels that serve consumers and small and medium-sized enterprises. On the basis of the directness of the channel, Dell can be compared to the early development of the similar case companies of this study, which then turned to dual channel strategies. Our question is whether Dell will continue to follow the development of similar case companies into multiple channels (dual or hybrid) or remain mainly direct. However, Compaq and many other companies are currently considering moving even one step further, from the hybrid sales channel to the dual sales channel, as a countermove to the threat posed by the success of Dell's direct sales approach (e.g., McDougall 2000).

The case companies have expanded their sales volume in Western Europe heavily since they entered the PC business. Naturally, one indication of performance is the trend in market share. According to IDC statistics on PC market shares (based on delivered units) in Western Europe for 1987-97, all the examined companies have been able to increase their market shares: IBM from 8% to 9%, Fujitsu ICL from less than 1% to more than 4%, Compaq from less than 1% to 15%, SNI from less than 1% to 5%, and Dell from 0% to 6% (Gabrielsson 1999, p. 145). On the basis of these figures, only limited generalizations can be made on the impact of sales channel strategies on performance. However, development toward multiple channels and, in particular, hybrid channels seems to increase the sales volumes. In addition, Dell's direct sales channel model seems highly effective. For the framework related to sales channel strategy choice and development in the PC industry, see Figure 3.

The case companies developed from single to multiple (either dual or hybrid) channels when they entered the cooperative stage of the "holistic internationalization process" (see Luostarinen 1994, p. 19). These channels are a response to increasing product-market diversity--for example, consumers, small and medium-sized enterprises, and large customer markets. In this kind of environment, firms can carry out the channel functions at relatively low cost by applying a multiple (dual, hybrid) sales channel strategy. Not only costs but also partnership advantages (market expansion ability, services, and finance) are targeted. The change of strategy from single to multiple channels is often triggered by increased environmental uncertainty caused by

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successful different channel strategies of competitors, which lead to multiple channel selections because of lateral rigidity and risk avoidance in decision making. (See P , P , P , P , and P in Table 2.)

A recent phenomenon increasing the environmental volatility is the growing use of the Internet in international marketing channels. This study has not focused on e-commerce, the importance of which is still relatively limited in Europe. The Internet can be used for improved communication with channel intermediaries and end customers. This leads to an increase in hybrid sales channels (see, e.g., McDougall 2000).

The development by similar case companies from a single direct to dual sales channels seems parallel to their organizational development toward either polycentric or regiocentric MNC structures, which has enabled the sales subsidiaries and regions to adapt to the diversifying marketplace (business/consumers) and has entailed the increasing use of channel intermediaries in firms' solution-based sales.( n7) The dual sales channel strategy, however, has been plagued by continuous conflicts and thereby has provided fewer partnership advantages. Only the leading PC companies either on the global/European level or in the home market with high producer power have been able to manage this channel strategy successfully. (See P , P , and P in Table 2.)

The similar case companies developed from dual to hybrid sales channel strategy as they decided to abandon direct sales to reduce channel conflicts and thus increase partnership advantages. The new emerging hybrid sales channel strategy is a mixture of an indirect distribution channel and producer control of marketing functions (new customer development and promotion). The selection of a hybrid sales channel has been accompanied by organizational development toward an advanced (geocentric, heterarchic) organizational structure and further standardization of the technology. In the face of the decreasing power of producers in relation to channel intermediaries, the firms increasingly achieve control by developing trustworthy and committed channel relations, which is also a prerequisite for achieving partnership advantages. (See P , P , P , and P in Table 2.)

Because of the risk of sales channel conflicts, the dissimilar case (Compaq) retained its successful single indirect sales channel strategy and did not change to a dual sales channel strategy as the similar companies did. However, Compaq started to develop its strategy to include some hybrid elements, which then became the model for the competitors' channel strategy. The development of the dissimilar case from a single indirect to a hybrid sales channel seems to corroborate the findings of the similar cases related to MNC organizational and technological development (see P and P in Table 2).

As a synthesis of this study, eight propositions are outlined. They are based on working propositions emanating from the literature, which then were used for empirical testing through the case interviews and finally were developed into the propositions summarized in Table 2.

DISCUSSION OF THE RESULTS The empirical findings related to the influence of the degree of internationalization (P ) on the sales channel strategy revealed an interesting result. It was found that as the degree of internationalization of companies increases, the sales channel strategy does not necessarily change from a lower degree of vertical integration to a higher degree of vertical integration but rather may be dependent on various other aspects. For example, it may depend on the existence or experience of channels or partnership advantages achieved through cooperation with the channel intermediaries. This is understandable, because the internationalization process literature (e.g., Luostarinen 1979) takes a stand related to operation strategy selection and not to channel strategy per se. This finding, however, is also consistent with internationalization process studies that

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emphasize the importance of cooperation as the step following the outward internationalization stage (see Luostarinen 1994, pp. 18-21).

As indicated in P , the empirical results showed that a relationship between the MNC management orientation stages and selection of the sales channel strategy can be identified. However, some deviations were also noted. First, the use of the dual sales channel strategy was noted in both the polycentric (expected) and the regiocentric (unexpected) stage. This can be explained by the existence of lateral rigidity in the decision making, which leads to continuation of the selected sales channel strategy though the MNC's organizational structure changes. Second, the hybrid sales channel was used in both the geocentric and heterarchic organization stages. This seems to reflect that the stages are relatively close to each other; indeed, heterarchic organizations are one type of geocentric organization (Hedlund 1985, pp. 15-16).

The economic structure (TCA) literature was useful in explaining both single channel choices and development toward multiple channels. The increasing product-market diversity (P ) and increased environmental uncertainty caused by competition and the introduction of new technologies (P ) were able to explain the channel development toward multiple sales channels (see Klein, Frazier, and Roth 1990). In relation to product-market development across markets, the EU integration process seems to be standardizing the channel strategies of PC companies across markets. Variation among countries exists more in respect to degree of usage (e.g., proportion between direct and indirect) than to strategy level (direct, indirect, dual, hybrid). Also, an expected result was that the relative cost of performing the channel functions between producers and channel members is decisive in channel design. A surprising result was that the influence of internal uncertainty was not explicitly identified, as previous studies had suggested (see, e.g., Anderson 1985), and therefore it was not included in P .

The long-term relations approach was able to explain the development from a single sales channel to multiple ones and the selection between dual and hybrid channels. The high partnership advantages influence the channel development from single (direct, indirect) to multiple (dual, hybrid), whereas the conflict potential drives development from dual to hybrid channels, as postulated in P . This finding supports the assumption that there is interaction between the channel strategy selection and long-term relations development, as has been proposed by many leading researchers (see, e.g., Frazier 1990, pp. 296-98; Moriarty and Moran 1990). Finally, it was noted that the relationship factors (power, trust, and commitment) influence the channel choice only indirectly as moderators, as argued in P . The trend in this study from vertical integration--based control to control based on long-term relations is probably part of a wider change in society. Furthermore, the consolidation of the channel intermediaries into powerful pan-European or global ones has altered the power interdependence so that PC producers can no longer rely on power-based control (e.g., coercive means). Trustworthy and committed long-term channels need to be built.

The stages based on the product-technology life cycle usually used in the model (e.g., introduction, growth) were adapted to respond to PC industry development (proprietary technology, solution-based technology, standard technology; see P ). The strongest point of the product-technology life cycle seems to be its ability to explain the development aspects of channels. The predictions of the product-technology life cycle are fully in line with the empirical TCA studies, in which the level of asset specificity has been found to relate positively to the vertical integration degree (see, e.g., Anderson 1985; Klein, Frazier, and Roth 1990).

Finally, the ability of the theories to explain the channel development varies. The traditional outward internationalization literature (Luostarinen 1979) is able to explain the choice of sales channel structure in the entry stage through the level of uncertainty and lateral rigidity in the decision-making process. Whereas, the

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growth beyond the ethnocentric MNC management orientation stage (Heenan and Perlmutter 1979) as well as the movement to the cooperative stage in the holistic internationalization process (Luostarinen 1994) seems to explain the development toward multiple channels better. Traditional TCA (Williamson 1985) seems to explain well the development from single direct or indirect to dual channels but loses ground in regard to the less economics-oriented area--that is, the selection of hybrid sales channels; instead, the literature based on long- term channel relations is better able to explain the partnership benefits acquired through such cooperation (Sethuraman, Anderson, and Narus 1988). The product-technology life cycle is able to explain the channel expansion into multiple channels through the diffusion of the product technology into a broader customer base (Lele 1986).

The findings of the study are limited to the qualitative research strategy of multiple case study methodology selected, and generalizations should be limited to the theoretical aspects. Therefore, it may be inappropriate to draw conclusions regarding behavior in the PC industry in general (Yin 1989, p. 21).

CONCLUSIONS The results of the article are expected to be useful to the academicians for research and teaching and practitioners for managerial application. The topic, being relatively under-researched, has provided a fruitful study area (see, e.g., Frazier 1990, pp. 256-71). We present the theoretical contributions, managerial implications, and future research suggestions based on this study.

It is possible to pinpoint some research results that make a theoretical contribution. First, the multiple channels in the context of international business have not previously been the object of an explicit study. The conventional view has been to consider sales channel decisions from a single channel viewpoint. Therefore, the multiple sales channel strategy alternatives, choice, and development studied here contribute by narrowing this research gap (see also Gabrielsson 1999). For example, Figures 1 and 2 contribute by presenting the channel alternatives in relation to international marketing operation modes. Second, this study has applied and developed the existing internationalization process and other theories, constructs, and concepts in examining the multiple sales channels. For example, a relationship between the outward/cooperative internationalization process stages (see Luostarinen 1994, p. 19) and channel selection was also identified. As the companies become highly internationalized, their tendency to cooperate and form alliances increases, which leads them to select hybrid sales channels. The results of the study may also be valid for the born globals. For them, time is money, and rapid market entries, penetration processes, and escalations are needed for global success. Therefore, the early use of strategic alliances and multiple channel strategies may be of importance for them. Third, the development of a dynamic framework (Figure 3) and propositions to guide further research related to the sales channel strategy choice and development for international expansion in the PC industry is a contribution. The propositions summarized in Table 2 are important results of this study.

In terms of managerial implications, the study results increase the knowledge related to sales channel strategies for international expansion. This is important because inappropriate channel selections are difficult to change and have a long-term impact on company performance. There are three main managerial implications: First, the entry and penetration marketing mode influences the sales channel strategy. Producers using indirect export and their own export do not use multiple channels; indirect exporting uses indirect sales channels, whereas their own exporting uses direct sales channels. Direct exporting opens up the possibility of using multiple channels: dual, in which both end customers and channel members are sold to simultaneously, and hybrid, in which sales and distribution are handled through foreign channel intermediaries but sales promotion is handled by the producer. As this study shows, the PC companies with a sales and marketing subsidiary within the market area are in the best position to use either dual or hybrid sales channels. Second,

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the result that the hybrid sales channel strategy is the favored or even the optimal solution for expanding the sales volume in the PC industry in Europe is of considerable managerial value. The importance of hybrid sales channels is growing in Europe. All of the four PC companies have begun to use hybrid sales channels. Third, managers in some other information technology industries will find that many of the research results may also be applicable in their business context. Hybrid sales channels have been used increasingly in other fields as well. In previous studies, multiple sales channel arrangements have also been found not only in PC industries but also in the hospital, health care equipment, and air conditioning equipment industries (see, e.g., Anderson, Day, and Rangan 1997, p. 66).

We present the following suggestions for further research: First, the influence of operation modes on sales channels is still in need of further empirical research. Second, hybrid sales channels will become central in the future as e-business takes off in Europe. The evolving hybrid sales channel for Compaq and other leading PC companies allows customers to place orders on the producers' Web site, while installation and service is handled by the local reseller, which receives a commission on the sale (McDougall 2000). The e-business influence on sales channels and the possible increase of hybrid sales channels in various industries in the future are worth studying. Finally, born global companies that are under heavy pressure to globalize their activities could immediately or rapidly start using multiple (dual or hybrid) sales channels. Through partnerships with strong and leading partners, multiple channels provide a way for these firms to expand rapidly to global markets while maintaining control over their marketing. Thus, they may be able to solve the problem of early globalization--that is, the lack of marketing experience and financial resources. We are involved in a research project examining this aspect.

NOTES (n1.) See also Leonidou and Katsikeas (1996).

(n2.) The entry and penetration stages are the stages after the entry stage, as defined by Luostarinen (1994).

(n3.) Decision making varies depending on the organization (ethnocentric: home culture dominated; polycentric: subsidiary dominated; regiocentric: regional subsidiary based; geocentric: headquarters controlled) (Heenan and Perlmutter 1979).

(n4.) A multifocal organization enables the firm to shift decision making from the national concern to the global (Doz 1986). A heterarchical organization exploits competitive advantages derived locally and seeks advantages from its global operation (Hedlund 1985). A transnational organization is one in which assets are interdependent and specialized with subsidiary operation (Bartlett and Ghoshal 1989).

(n5.) The partnership advantages provide a coordinated effort that is focused on jointly satisfying the requirements of the customer marketplace (Sethuraman, Anderson, and Narus 1988, pp. 327-31). Channel conflicts involve behavior that impedes one of the members from achieving its goals (Stern, El-Ansary, and Brown 1989, p. 361).

(n6.) A firm's power is based on the nature of the other firm's dependence in the relationship. Trust is a party's expectation that another party is reliable in the relationship. Commitment refers to an implicit or explicit pledge of relational continuity between parties (Dwyer, Schurr, and Oh 1987).

(n7.) Solution-based sales include hardware that has become standardized and software applications that require system integration skills.

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Table 1. Summary of Theories and Applications Explaining the Sales Channel Structure Decision Legend for Chart: A - Theory/Application B - Objective C - Underlying Rationale D - Factors E - Sales Channel Structure A B C D E Internationalization Explaining the process outward and holistic internationalization pattern Laterally rigid Product, operations, decision making, and market organizational posture; producer; learning and channel factors Choice of channel structure in entry and penetration stage MNC management Explaining the orientation organization structure stages and locus of decision making Headquarters predisposition Ethnocentric, polycentric, toward regiocentric, global integration geocentric, or and local responsiveness heterarchical stage Choice of horizontal composition of channel structure Sales channel Explaining the economic structure economic structure (TCA) and processes of the channel Cost and efficiency Asset specificity, of performing the external uncertainty distribution and (volatility, transaction functions diversity), internal uncertainty, transaction volume (frequency, size) Choice of degree of vertical integration of channel structure

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Long-term Explaining the relationship development of the channel relationship over time Interdependence Partnership advantages, development, comparison sales channel level conflicts, and relationship factors Choice between multiple channel structures Product-technology Explaining the life cycle product technology development Diffusion and Life cycle stages adoption of a new innovation Choice of channel Structures

Table 2. Summary of Propositions P : A low degree of internationalization increases the probability of the use of an indirect sales channel strategy. In contrast, a higher degree of internationalization increases the probability that an existing channel or one from which positive experience has been gained is used in the outward stage and a multiple (dual, hybrid) channel is used in the cooperative stage.

P : The MNC structure development of a PC company influences the probability of a particular channel strategy (on the company level): A single (indirect or direct) sales channel is used in the ethnocentric stage, a dual sales channel in the poly-/regiocentric stage, and a hybrid sales channel in the geo-/heterarchic stage.

P : The higher the product-market diversity, the higher is the probability of the choice of multiple (dual, hybrid) channels over single (direct or indirect) channels, which again are guided by transaction size economies.

P : In the proprietary technology stage, direct (sales representatives) channels are more probable; in the solution stage, indirect sales channels are more probable. The dual sales channels are created through transformation into a new stage from the previous one. In the standard technology stage, the probability of the selection of hybrid sales or direct (marketing) channels increases.

P : The higher the environmental uncertainty (volatility and diversity) caused by competition and new technologies (e.g., the Internet), the higher is the probability of the choice of multiple (dual, hybrid) sales channels over single (indirect, direct) sales channels.

P : Diversity in the relative cost of performing channel functions between producer and channel intermediaries increases the probability of the choice of multiple (dual, hybrid) sales channels over single (direct or indirect) channels.

P : Potential for high partnership advantages influences the development of the sales channel strategy from single (direct, indirect) to multiple (dual, hybrid), whereas high conflict (potential) influences it from a dual to a hybrid sales channel strategy.

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P : High producer power enables the producer to keep dual sales channel conflicts minimal, whereas commitment and development of trust are requirements for the partnership advantages of the indirect/hybrid sales channel strategy.

DIAGRAM: Figure 1. Entry, Penetration Modes, and Sales Channels for International Expansion

DIAGRAM: Figure 2. Multiple Sales Channels in the PC Industry

DIAGRAM: Figure 3. Framework for Sales Channel Strategy Choice and Development in the PC Industry

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Submitted September 2000

Revised October 2001

~~~~~~~~ By Mika Gabrielsson; V. H. Manek Kirpalani and Reijo Luostarinen

Mika Gabrielsson is Professor of International Business, Helsinki School of Economics.

V. H. Manek Kirpalani is Distinguished Professor Emeritus of Marketing and International Business, Concordia University; Dean International, EMPI, Delhi; and Visiting Professor of International Business, Helsinki School of Economics.

Reijo Luostarinen is Professor and Head of International Business, Director of the Center for International Business Research, and former Vice-Rector, Helsinki School of Economics.

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