Distribution decisions

By Prof. Prasad Kulkarni

Marketing channels
Set of interdependent organizations

involved in the process of making a product or service available for use or consumption

Marketing channels and value networks

The importance of channels

a. Push strategy: strategy involves the

manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end user. b. Pull strategy: involves the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it.

Channel development Hybrid channels Value networks: a system of partnerships and alliances that a firm creates to source, augment and deliver its offerings

 Demand chain planning

Distribution resource planning

Enterprise planning system

The role of marketing channels

Five marketing flows in the marketing channels Physical flow Title flow Payment flow Information flow Promotion flow

Channel levels
Consumer marketing channels (

0,1,2, 3, 4 level channels) Industrial marketing channels ( 0,1,2,3 level channels)

Channel design decisions

Analyzing Customers Desired Service Output

Levels In designing the marketing channel, the marketers must understand the service output levels desired by target customers.
Channels produce five service outputs:

Lot size. Waiting and delivery time. Spatial convenience. Product variety. Service backup. The marketing-channel designer knows that providing greater service outputs means increased channel costs and higher prices for customers.

 Establishing Objectives and Constraints Channel objectives should be stated in terms of

targeted service output levels. Channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs. Planners can identify several market segments that want different service levels. Channel objectives vary with product characteristics. Channel design must take into account the strengths and weaknesses of different types of intermediaries. Legal regulations and restrictions also affect channel design.

 Identifying Major Channel Alternatives Companies can choose from a wide variety of

channels for reaching customersfrom sales forces, to agents, distributors, dealers, direct mail, telemarketing, and the Internet. Each channel has unique strengths as well as weaknesses. Most companies now use a mix of channels. Each channel hopefully reaches a different segment of buyers and delivers the right products to each at the least cost. A channel alternative is described by three elements:
The types of available business intermediaries. The number of intermediaries needed.

The terms and responsibilities of each channel member.

 Types of Intermediaries

A firm needs to identify the types of

intermediaries available to carry on its channel work. Companies should search for innovative marketing channels. Sometimes a company chooses an unconventional channel because of the difficulty or cost of working with the dominant channel. The advantage is that the company will encounter less competition during the initial move into this channel.

 Companies have to decide on the number of

intermediaries to use at each channel level. Three strategies are available: exclusive distribution, selective distribution, and intensive distribution. Exclusive distribution means severely limiting the number of intermediaries. It is used when the producer wants to maintain control over the service level and outputs offered by the resellers. Often it involves exclusive dealing arrangements. Exclusive deals between suppliers and retailers are becoming a mainstay for specialists looking for an edge in a business world.

 Selective distribution involves the use of more

than a few, but less than all, of the intermediaries who are willing to carry a particular product Intensive distribution consists of the manufacturer placing goods or services in as many outlets as possible. Manufacturers are constantly tempted to move from exclusive or selective distribution to intensive distribution to increase coverage and sales.

 Terms and Responsibilities of Channel

Members The producer must determine the rights and responsibilities of participating channel members. A) The main elements in the trade-relations mix are: Price policy. Conditions of sale. Distributors territorial rights. Mutual services and responsibilities.

 Evaluating the Major Alternatives Each channel alternative needs to be

evaluated against economic, control, and adaptive criteria. Economic Criteria

Each channel will produce a different level of sales

and costs. When sellers discover a convenient lower-cost channel, they try to get their customers to us it. Companies that are successful in switching customers to lower-cost channels, assuming no loss of sales or deterioration in service quality, will gain a channel advantage.

 Control and Adaptive Criteria

To develop a channel, members must make

some degree of commitment to each other for a specified period of time Yet these commitments invariably lead to a decrease in the producers ability to respond to a changing marketplace. In rapidly, changing, volatile, or uncertain product markets, the producer needs channel structures and policies that provide high adaptability.

Channel Management decisions

Selecting Channel Members Companies need to select their channel

members carefully. To facilitate channel member selection, producers should determine what characteristics distinguish better intermediaries. They should evaluate the:
Number of years in business. Other lines carried. Growth and profit records. Financial strength. Cooperativeness. Service reputation.

 If the intermediaries are sales agents, producers

should evaluate the: o Number and character of other lines carried. o Size and quality of the sales force. If the intermediaries are department stores that want exclusive distribution, the producer should evaluate: o Locations. o Future growth potential. o Type of clientele.

 Motivating Channel Members A company needs to determine intermediaries

needs and construct a channel position such that its channel offering is tailored to provide superior value to these intermediaries. Stimulating channel members to top performance starts with understanding their needs and wants. The company should provide training programs and market research programs to improve intermediaries performance. The company must constantly communicate its view that the intermediaries are partners in a joint effort to satisfy end users of the product. Producers vary greatly in skill in managing distributors.

 Channel power can be defined as the ability

to alter channel members behavior. Manufacturers can draw on the following types of power to elicit cooperation:
Coercive power. Reward power. Legitimate power. Expert power.

Referent power.

 Coercive and reward power are objectively

observable. Legitimate, expert, and referent power are more subjective and dependent on the ability and willingness of parties to recognize them. Most producers see gaining intermediaries cooperation as a huge challenge. Companies that are more sophisticated try to forge a long-term partnership with distributors.

 Evaluating Channel Members

Producers must periodically evaluate intermediaries performance against such standards as sales quota attainment, average inventory levels, customer delivery times, treatment of damaged and lost goods, and cooperation in promotional and training programs.
Under performers need to be counseled, retrained,

motivated, or terminated.

 Modifying Channel Arrangements A producer must periodically review and

modify its channel arrangements.

Modification becomes necessary when the

distribution channel is not working as planned. When consumer-buying patterns change. When the market expands. When new competition arises. When innovative distribution channels emerge.

 And when the product moves into the later stages

in the product life cycle. No marketing channel will remain effective over the whole product life cycle. In competitive markets with low entry barriers, the optimal channel structure will inevitably change over time.
o The change could involve adding or dropping individual

channel members. o Adding or dropping particular market channels. o Developing a totally new way to sell goods.

The most difficult decision involves revising the

overall channel strategy.

Channel integration and systems

Vertical Marketing Systems One of the most significant recent channel

developments is the rise of vertical marketing systems. A conventional marketing system comprises an independent producer, wholesaler(s), and retailer(s). A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, owns the others, franchises them, or has so much power that they all cooperate.

 VMSs arose as a result of strong channel members

attempts to control channel behavior and eliminate the conflict that results when independent members pursue their own objectives. VMSs achieve economies through: Size. Bargaining power. The elimination of duplicated services. There are three types of VMS: 1. Corporate. 2. Administered. 3. Contractual.

 A corporate VMS combines successive stages of

production and distribution under single ownership. Administered VMS An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers.

 The most advanced supply-distributor

arrangement for administered VMS involves distribution programming that can be defined as building a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors. The manufacturer establishes a department within the company called distributor-relations planning. o Its job is to identify distributor needs and build up merchandising programs to help each distributor operate as efficiently as possible.

 Contractual VMS

A contractual VMS consists of independent firms

at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Contractual VMSs now constitute one of the most significant developments in the economy.

 They are of three types:

Wholesaler-sponsored voluntary chains. 2. Retailer cooperatives. 3. Franchise organizations. The traditional system is the manufacturersponsored retailer franchise. Another is the manufacturer-sponsored wholesaler franchise. A new system is the service-firm-sponsored retailer franchise
1.

 Horizontal Marketing Systems

Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity.

Conflict, cooperation and competition

Channel conflict is generated when one

channel members actions prevents the channel from achieving its goal. Channel coordination occurs when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals.

 Types of Conflict and Competition Vertical channel conflict means conflict

between different levels within the same channel. Horizontal channel conflict involves conflict between members at the same level within the channel. Multi-channel conflict exists when the manufacturer has established two or more channels that sell to the same market. o Multi-channel conflict is likely to be especially intense when the members of one channel get a lower price (based on larger volume purchases) or work with a lower margin.

 Causes of Channel Conflict

One major cause is goal incompatibility. 2. Some conflict arises from unclear roles and rights. 3. Conflicts can also stem from differences in perception. 4. Conflict might additionally arise because of the intermediarys dependence on the manufacturer
1.

 Managing Channel Conflict As companies add channels to grow sales,

they run the risk of creating channel conflict. Some channel conflict can be constructive and lead to better adaptation to a changing environment, but too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better. There are several mechanisms for effective conflict management. o One is the adoption of superordinate goals
o Channel members come to an agreement on the

fundamental goal they are jointly seeking.

 A useful step is to exchange persons between two or

more channel levels. Co-optation is an effort by one organization to win the support of the leaders of another organization by including them in advisory councils, and the like. Much can be accomplished by encouraging joint membership in and between trade associations. When conflict is chronic or acute, the parties may have to resort to: 1. Diplomacy. 2. Mediation. 3. Arbitration. 4. Lawsuits.

Legal and Ethical Issues in Channel Relations

Companies are legally free to develop

whatever channel arrangements suit them. In fact, the law seeks to prevent companies from using exclusionary tactic that might keep competitors from using a channel. A) Many producers like to develop exclusive channels for their products. When the seller requires that these dealers not handle competitors products, this is called exclusive dealing. Exclusive dealing is legal as long as they do not substantially lessen competition or tend to create a monopoly, and as long as both parties enter into the agreement voluntarily.

 Exclusive dealing often includes exclusive

territorial agreements.
The producer may agree not to sell to other dealers

in a given area. The buyer may agree to sell only in its own territory.
This second practice has become a major legal issue.

 Producers of a strong brand sometimes sell it to

dealers only if they will take some or all of the rest of the line. 1. This practice is called full-line forcing. Such tying agreements are not necessarily illegal, but they do violate U.S. law if they tend to lessen competition substantially. Producers are free to select their dealers, but their right to terminate dealers is somewhat restricted 1. Producers can drop dealers for cause but they cannot drop dealers if, the dealer refuses to cooperate in doubtful legal arrangements.

E- commerce marketing Practices

E-business describes the use of electronic means

and platforms to conduct a companys business. E-commerce means that the company or site offers to transact or facilitate the selling of products and services online. E-purchasing means companies decide to purchase goods, services, and information from various online suppliers. E-marketing describes company efforts to inform, communicate, promote, and sell its products and services over the Internet. We can distinguish between pure-click companies and brick-and-click companies.

 Pure-Click Companies

There are several kinds of pure-click

companies: 1. Search engines. 2. Internet Service Providers (ISPs). 3. Commerce sites. 4. Transaction sites. 5. Content sites. 6. Enabler sites.

 Business-to-Business E-Commerce

More activity is being conducted on business-to-

business (B2B) sites. The impact of B2B sites is to make markets more efficient. With the Internet, buyers have easy access to a great deal of information.

 They can get information from:

Supplier Web sites. 2. Infomediaries. 3. Market makers. 4. Customer communities. Suppliers of superior products will be able to offset price transparency with value transparency. Suppliers of undifferentiated products will have to drive down their costs in order to compete.
1.

 Brick-and-Click Companies

Many companies have agonized over whether to add an online e-commerce channel. Many companies opened Web sites describing their business but resisted adding e-commerce to their sites. They felt that selling their products or services online would produce channel conflict. Adding an e-commerce channel creates the treat of a backlash from retailers, brokers, agents, or other intermediaries. The question is how to sell both through intermediaries and online.

 There are at least three strategies for trying to

gain acceptance from intermediaries:

Offer different brands or products on the Internet. Offer the off-line partners higher commissions to cushion

the negative impact on sales. Take orders on the Web site but have retailers deliver and collect payment.

Some pure or predominately online companies

have invested in brick-and-mortar sites. Ultimately, companies may need to decide whether to drop some or all of their retailers and go direct.