CHAPTER TWO

The Competitive
Behavior Of Retail
Institution
Learning Objectives
After studying this chapter you should be able to:
1. Explain how companies use marketing
channels and discuss the functions
these channels perform
2. Discuss how channel members interact
and how they organize to perform the
work of the channel
3. Identify the major channel alternatives
open to a company
4. Discuss the nature of retail competition
5. The competitive strategies of retailers
Marketing or Distribution Channel
 A set of interdependent organizations involved in
the process of making a product or service
available for use or consumption by the consumer
or business user.
 The term supply chain may be too limited—it
takes a make-and-sell view of the business. It
suggests that raw materials, productive inputs,
and factory capacity should serve as the starting
point for market planning.
 A better term would be demand chain because it
suggests a sense-and-respond view of the
market. Under this view, planning starts with the
needs of target customers, to which the company
responds by organizing a chain of resources and
activities with the goal of creating customer value.
 Supply Chains and the Value Delivery Network

 The value delivery network is

made up of the company, suppliers,
distributors, and, ultimately,
customers who “partner” with each
other to improve the performance of
the entire system.
 The Nature and Importance of Marketing
Channels
Why do producers give some of the selling
job to channel partners?

How Channel Members Add Value

 By bridging the major time, place and
possession gaps that separate goods and
services from those who would use them.
 How Channel Members Add Value
 Information- gathering and distributing
marketing research and intelligence.
Promotion-develop and spread
persuasive communications about an
offer.
Contact- finding and communicating
with prospective buyers.
Matching- shaping and fitting the offer
to the buyers needs, including activities
such as manufacturing, grading,
assembling, and packaging.
Negotiation- reaching an agreement on
price and other terms of the offer so that
ownership or possession can be
transferred.
Physical distribution- transporting and
storing goods.
Financing- acquiring and using funds to
cover the costs of carrying out the
channel work.
Risk taking- Assuming the risks of
carrying out the channel work.
From economic system’s point of
view, the role of marketing
intermediaries is to transform the
assortments of products made by
producers into the assortments
wanted by consumers.
Marketing channel members buy
large quantities from many
producers and break them down into
the smaller quantities and broader
assortments desired by consumers.
 Number of channel levels

Do you think that the more

channel member result in the
more customer contact?
This shows some common business
distribution channels.
The business marketer can use its own
sales force to sell directly to business
customers.
Or it can sell to various types of
intermediaries, who in turn sell to these
customers.
 Each layer of marketing intermediaries
that performs some work in bringing the
product and its owner ship closer to the
final buyer is a channel level.
Channel 1, called a direct
marketing channel, has no
intermediary levels ─ the
company sells directly to
consumers.
The remaining channels are
indirect marketing channels,
containing one or more
intermediaries.
 Channel Behavior
 Each channel member depends on the other members
– Each member plays a role and specialized in
performing some functions
– Ideally all channel members should work together
smoothly – success of the individual member depends on
the success of the entire channel
– However, individual channel members typically
“selfish”, concerned with their own short-run goals and
their dealings with firms closest to them in the channel
Channel conflict
 Disagreement among marketing channel members on
goals and roles – who should do what and for what
rewards
– Horizontal conflict – occurs among firms at the same
level of the channel (e.g. among retailers)
– Vertical conflict – occurs between different levels of
 Channel Behavior and Organization

They are complex behavioral systems in

which people and companies interact to
accomplish individual, company, and
channel goals.
Some channel systems consist of only
informal interactions among loosely
organized firms.
Others consist of formal interactions
guided by strong organizational structures.
Moreover, channel systems do not stand
still ─ new types of intermediaries emerge
and whole new channel systems evolve.
 Channel Behavior and
Organization
1. Conventional Distribution systems
 Consists of one or more independent
producers, wholesalers and retailers.
Each seeks to maximize its own profits and
there is little control over the other
members.
No formal means for assigning roles and
resolving conflict.
2. Vertical Marketing Systems(VMS)
Provide channel leadership and consist of
producers, wholesalers and retailers acting
as a unified system and consist of:
 Corporate Vertical Marketing System- integrates
successive stages of production and distribution
under single ownership.
 Contractual Vertical Marketing System- consists
of independent firms at different levels of
production and distribution
-Join together through contracts to obtain more
economies or sales impact than each could
achieve alone.
-Most common form is the franchise organization.

 Administered Vertical Marketing System- has a

few dominant channel members without common
ownership. leadership comes from size and
power.
3. Horizontal Marketing Systems
Includes two or more companies at one
level that join together to follow a new
marketing opportunity.
Companies combine financial, production
or marketing resources to accomplish
more than any one company could alone.
4. Multichannel Distribution Systems
Hybrid marketing channels exist when a
single firm set up two or more marketing
channels to reach one or more customer
segments.
Hybrid Marketing Channels
 Advantages
- Increased sales and market coverage.
- New opportunities to tailor
products/services to specific needs of
diverse customer segments.
 Challenges
- Hard to control.
- Create channel conflict.
 Changing Channel Organization

Disintermediation is the cutting

out of marketing channel
intermediaries by product or
service producers or the
displacement of traditional
resellers by radical new types of
intermediaries.
 Channel Design Decisions
Designing a channel system
requires:
1. Analyzing consumer needs
2. Setting channel objectives
3. Identifying major channel
alternatives
4. Evaluation
 1. Analyzing Consumer Needs
Designing the marketing channel starts
with finding out what target consumers
want from the channel.
Do consumers want to buy from nearby
locations or are they willing to travel to
more distance? centralized locations?
Would they rather buy in person, by
phone, or online?
Do they value breadth of assortment or
do they prefer specialization?
 2. Setting Channel Objectives
Companies should state their marketing
channel objectives in terms of targeted
levels of customer service.
Usually, a company can identify several
segments wanting different levels of
service.
The company should decide which
segments to serve and the best channels
to use in each case.
In each segment, the company wants to
minimize the total channel cost of
meeting customer service requirements.
 Setting Channel Objectives
Setting Channel Objectives are
influenced by:
- the nature of the company - its
products
- its marketing intermediaries -its
competitors
- and the environment.
 For example, the company’s size and
financial situation determine which
marketing functions it can handle itself
and which it must give to intermediaries.
 3. Identifying Major Alternatives
 In terms of:
-Types of intermediaries
- Number of intermediaries
- Responsibilities of each channel member
Types of intermediaries
 A firm should identify the types of channel
members available to carry out its channel
work. Most companies face many channel
member choices.
 For example, until recently, Dell sold directly to
final consumers and business buyers only
through its sophisticated phone and Internet
marketing channel.
 It also sold directly to large corporate,
institutional, and government buyers
using its direct sales force.
 However, to reach more consumers and
match competitors such as HP and Apple,
Dell now sells indirectly through retailers
such Best Buy, Staples, and Walmart.
 Company sales force
 Manufacturers agency- are independent
firms whose sales force handle related
products from many companies in
different regions or industries.
 Industrial distributors.
 Number of Marketing Intermediaries

Intensive distribution - a strategy in

which they stock their products in as
many outlets
as possible.
These products must be available
where and when consumers want
them. For example, toothpaste, candy,
and other similar items are sold in
millions of outlets to provide
maximum brand exposure and
consumer convenience.
Selective Distribution—the use of more than
one but fewer than all of the intermediaries
who are willing to carry a company’s products.
 Most television, furniture, and home appliance
brands are distributed in this manner.

Exclusive Distribution- in which the producer

gives only a limited number of dealers the
exclusive right to distribute its products in
their territories.
 Exclusive distribution is often found in the
distribution of luxury automobiles and like
Rolex Watches.
Responsibilities of channel members- the
producer and intermediaries need to
agree on the terms and responsibilities of
each channel member.
They should agree on price policies,
conditions of sale, territorial rights, and
specific services to be performed by
each party.
4. Evaluating the Major Alternatives
-Each alternative should be evaluated against
economic, control, and adaptive criteria.
 Economic Criteria, a company compares the
likely sales, costs, and profitability of different
channel alternatives.
 Control Criteria- refers to channel members
control over the marketing of the product
 Adaptive criteria- refers to the ability to
remain flexible to adapt to environmental
changes.
Relationship Management Among Retailers and
Suppliers
Disagreement may occur:
 Control over channel
 Profit allocation
 Number of competing retailers
 Product displays
 Promotional support
 Retail Strategy

• An over all plan for guiding a retail firm.

• Influences the firms response to market
forces
Six Steps In Strategic Planning
1. Define the type of business
2. Set long- run and short- run objectives
3. Determine the customer market
4. Devise an overall long-run plan
5. Implement an integrated strategy
6. Evaluate and correct
 Role Of Competition In Retailing
• Retailing is more competitive than most other
sector.
• Retail competition is multidimensional i.e 5 level
-1st level-product, services, communication, and
physical distribution.
-2nd level- related to retail organization and its
horizontal competitors.
-3rd level- other retail organization and the vertical
competition.
-4th level- deal with geographical dimension
including location and shopping environment.
-5th level- nature of the marketplaces (local,
national & international) economy, including
economic boom, recession, inflation prone etc….
 Dimensions of change in retail competition
 Retail competition has been changing
along spatial, institutional and
functional dimensions.
 Spatial dimension- retail follows
population trends.
 Institutional dimension- both large
and small firms are engaged in retail
competition.
 Functional dimension- takes two
dimensions e.g price competition; and
non price competition.
 Retail concentration/attention
 High concentration of retail competition
could be attributed to ease of entry.
 High profit in retailing invites competition
and resulting in high concentration.
 Large firms taking over small firms lead to
polarization and concentration.

Competitive advantage (differentiation)

 Retailers need to differentiate themselves
from their competitors.
 Competitive advantage is achieved through
differential congruence.
 Successful retailers must achieve
differential congruence as a means of
coping with growing competition.
Competitive strategies
 Strategies that strongly position the
company against competitor and give the
company strongest possible strategic
advantage.
 Competitive strategies help in:
1. Building profitable customer
relationships
2. Gaining competitive advantage
3. Analyzing their competitors
 Basic competitive strategies
Over cost leadership
Companies try to achieve the lowest
production and distribution cost.
Low costs let its price lower than its
competitors and win a large market
share.
Example
-Big bazaar
Differentiation
Company concentrates on creating a
highly. differentiated product line and
marketing program
So that it comes across as the class
leader in the industry.
Example
-IBM –in information technology and
services &
- Samsung –in consumer electronics and
household appliances.
Focus
 Company focuses its efforts on
serving a few market segments well
rather than going after the whole
market .
Example
-Tetra food supply 80% of pet
tropical fish food.
Companies can pursue any of
the three strategies called value
disciplines for delivering
superior customer value.
- Operational excellence
- Customer intimacy
-Product leadership
 First value disciplines –Operational
Excellence
• To be a leader in operational excellence
-A company must provide reliable
products or services that can be
purchased at:
-Competitive price and
- With minimal difficulty or
inconvenience
• Boast highly efficient delivery
processes built around sophisticated
information system.
 Wal-Mart is recognized over the world
for its cost efficiencies.
 If a price war were the break out
tomorrow the giant retailer could outlast
all its competitors.
 It can therefore maintain the lowest
prices and attract those customers who
base their buying decision primarily on
price.
 Second value disciplines-customer
intimacy
 While companies that excel at
operational excellence run their
businesses as lean, mean machines and
 Those pursuing a strategy of customer
intimacy provide superior value by
tailoring and shaping products and
services to unique customer needs.
 Value–added services focused marketing
and responsive/flexible processes are
the hallmarks of this value discipline.
Ritz Carlton Hotels
 Was identified as a customer intimacy leader.
 The Ritz Carlton has built a database on its
customer.
 Every time a customer stays at the hotel,
that information is accessed to establish the
needs of that customer.
 The hotel responds accordingly.
 Whether it is by leaving fruit instead of
chocolates in the room.
 Or placing the telephone on the other side of
the bed for left handed guests.
 It is attentive to customer needs.
 Third value discipline –product
leadership
A product leader
 Continually develops new and unique
products and services that have an
emotional and rational surplus value for
clients.
 Do not have the lowest –cost operations
because their customers are not price
sensitive.
 Their priority is getting the hottest new
products, whatever it might cost.
 Conclusion
 Classifying competitive strategies as
value disciplines defines marketing
strategy in terms of single minded
pursuit of delivering superior value to
customers.
 Each value discipline defines a specific
way to build lasting customer
relationship.
 It helps the firms to analyze their
competitors and design effective
competitive marketing strategies to
gain competitive advantage.