Distribution Channels for Philips

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Distribution Channels of Philips Domestic Appliances and
Personal Care Products in Chinese Economic Transition --
A Case Study
Don Y. Leea , Gangling Chaob and Weiling Yec
aHong Kong Polytechnic University, Hong Kong
b,cShanghai University of Finance and Economic, China
Address for Correspondence:
Don Y. Lee PhD
Associate Professor of Marketing
Department of Business Studie
Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong Special Administrative Region
China
Telephone: 852-2766-7119
Facsimile: 852-2765-0561
Email: budonlee@polyu.edu.hk
The first author acknowledges the support of a grant for this research from his institution, the Hong Kong Polytechnic University (grant number: G-S943). The authors would like to thank Professor Gerald Albaum and Professor David Wilson for their constructive comments on an earlier version of the case.

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Abstract
There is general agreement that the distribution channel is the key to any company's success in Chinese market. Nonetheless, distribution is always cited as one of the most serious problems for foreign companies (including joint ventures) that operate in China. One of the reasons contributing to the difficulties in managing channels in China is that they are so different from western channels, thus difficult to understand. This teaching case provides detailed information about distribution channels in China to business students, managers and scholars who are interested in marketing in China.

The case illustrates distribution channels management of an international joint venture company in China's transitional economy, using Philips domestic appliances and personal care products as examples. The case devoted considerable coverage of key channel management issues, distributor selection, contract and incentive designs, monitoring and socialization between the boundary personnel of the up-stream and down-stream. In addition, the case also shows the general management problems in the state-run distribution companies, particularly, inequitable reward systems. In line of transaction cost theory, the case gives descriptions of Chinese distributors' opportunism (such as selling to other distribution territories); and exemplifies associations that distributors’ opportunism may result from high uncertainty in market demand and legal enforcement of Chinese regulations, and from inadequate incentive design. Channel restructuring was the decision context. After six years’ successful cooperation with a Chinese distribution company which was Philips' sole distributor for its domestic appliances and personal care products in the Shanghai territory, Philips found that the distributor’ performance was constantly declining. Philips managers were therefore faced with decisions of whether or not to restructure the distribution system with consideration of the business environmental changes that had occurred in the past six years in China.

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Distribution Channels of Philips Domestic Appliances and Personal Care Products in Chinese Economic Transition --
A Case Study
One evening in April 1998, Mr. Ricky Chan was still working in his office in the Philips Building in Shanghai, China. He had to make a decision whether to change the distribution structure of domestic appliance and personal care (DAP) product lines in Shanghai. The distribution system had been unchanged in almost eight years. Ricky is the Director of the DAP Division, one of the seven divisions of the Philips Electronics China Group. The Group's headquarters moved from Hong Kong to Shanghai in 1996. Ricky, a native of Hong Kong, joined Philips in 1991 after he obtaining an MBA degree from the University of Hawaii. He returned to Hong Kong and worked for Philips Hong Kong for five years, responsible for various operations in mainland China. In 1997, he was assigned to work as a director in the DAP division.

The DAP Division had seven regional offices (a region covered several provinces) and a total of 23...
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