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WEEK 11: Topic 10-Marketing Channels (Part 1)
PREVIEWING THE CONCEPTS: CHAPTER OBJECTIVES
1. Explain why 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. Explain how companies select, motivate, and evaluate channel members.
5. Discuss the nature and importance of marketing logistics and integrated supply chain management.
CHAPTER OVERVIEW
This chapter deals with distribution.
An individual firm’s success depends not only on how well it performs but also on how well its entire marketing channel competes with competitors’ channels.
To be good at customer relationship management, a company must also be good at partner relationship management.
The first part of this chapter explores the nature of marketing channels and the marketer’s channel design and management decisions.
We then examine physical distribution—or logistics—an area that is growing dramatically in importance and sophistication.
10.1 INTRODUCTION
Most firms cannot bring value to customers by themselves. Instead, they must work closely with other firms in a larger value-delivery network.
10.2 SUPPLY CHAINS AND THE VALUE DELIVERY NETWORK
The supply chain consists of “upstream” and “downstream” partners.
Upstream from the company is the set of firms that supply the raw materials, components, parts, information, finances, and expertise needed to create a product or service.
Marketers have traditionally focused on the “downstream” side of the supply chain—on the marketing channels (or distribution channels) that look forward toward the customer.
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.
As defined in Chapter 2, a 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.
10.3 THE NATURE AND IMPORTANCE OF MARKETING CHANNELS
Producers try to forge a marketing channel (or distribution channel)—a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user.
The role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers.
Members of the marketing channel perform many key functions. Some help to complete transactions:
· Information: Gathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange.
· Promotion: Developing and spreading persuasive communications about an offer.
· Contact: Finding and communicating with prospective buyers.
· Matching: Shaping and fitting the offer to the buyer’s 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.
Others help to fulfill the completed transactions:
· Physical distribution: Transporting and storing goods.
· Financing: Acquiring and using funds to cover the costs of the channel work.
· Risk taking: Assuming the risks of carrying out the channel work.
Number of Channel Levels
A channel level is each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer.
A direct marketing channel has no intermediary levels; the company sells directly to consumers.
An indirect marketing channel contains one or more intermediaries.
From the producer’s point of view, a greater number of levels means less control and greater channel complexity.
10.4 CHANNEL BEHAVIOR AND ORGANIZATION
A marketing channel consists of firms that have partnered for their common good. Each channel member depends on the others.
Each channel member plays a specialized role in the channel. The channel will be most effective when each member assumes the tasks it can do best.
Disagreements over goals, roles, and rewards generate channel conflict.
Horizontal conflict occurs among firms at the same level of the channel.
Vertical conflict occurs between different levels of the same channel.
Vertical Marketing Systems
A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole.
A vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate.
A Corporate VMS integrates successive stages of production and distribution under single ownership.
A Contractual VMS consists of independent firms at different levels of production and distribution, who join together through contracts to obtain more economies or sales impact than each could achieve alone.
The franchise organization is the most common type of contractual relationship—a channel member called a franchisor links several stages in the production‑distribution process.
There are three types of franchises.
1. The manufacturer‑sponsored retailer franchise system—for example, Ford and its network of independent franchised dealers.
2. The manufacturer‑sponsored wholesaler franchise system—Coca‑Cola licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup concentrate and then bottle and sell the finished product to retailers in local markets.
3. The service‑firm‑sponsored retailer franchise system—examples are found in the auto-rental business (Avis), the fast‑food service business (Burger King), and the motel business (Holiday Inn).
In an Administered VMS, leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members.
Horizontal Marketing Systems: Two or more companies at one level join together to follow a new marketing opportunity.
Multichannel Distribution Systems: Occurs when a single firm sets up two or more marketing channels to reach one or more customer segments.
Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones.
10.5 CHANNEL DESIGN DECISIONS
Marketing channel design calls for analyzing consumer needs, setting channel objectives, identifying major channel alternatives, and evaluating them.
Analyzing Consumer Needs
As noted previously, marketing channels are part of the overall customer-value delivery network.
The company must balance consumer needs not only against the feasibility and costs of meeting these needs but also against customer price preferences.
Companies should state their marketing channel objectives in terms of targeted levels of customer service.
The company should decide which segments to serve and the best channels to use in each case.
The company’s channel objectives are influenced by the nature of the company, its products, its marketing intermediaries, its competitors, and the environment. Environmental factors such as economic conditions and legal constraints may affect channel objectives and design.
Identifying Major Alternatives
A firm should identify the types, number, and responsibilities of channel members available to carry out its channel work.
Number of Marketing Intermediaries
Companies must also determine the number of channel members to use at each level.
Three strategies are available:
1. Intensive distribution: Ideal for producers of convenience products and common raw materials. It is a strategy in which they stock their products in as many outlets as possible.
2. Exclusive distribution: Purposely limit the number of intermediaries handling their products. The producer gives only a limited number of dealers the exclusive right to distribute its products in their territories.
3. Selective distribution: This is the use of more than one, but fewer than all, of the intermediaries who are willing to carry a company’s products.
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.
Evaluating the Major Alternatives
Using economic criteria, a company compares the likely sales, costs, and profitability of different channel alternatives.
Using control issues means giving them some control over the marketing of the product, and some intermediaries take more control than others.
Using adaptive criteria means the company wants to keep the channel flexible so that it can adapt to environmental changes.
Designing International Distribution Channels
In some markets, the distribution system is complex and hard to penetrate, consisting of many layers and large numbers of intermediaries.
At the other extreme, distribution systems in developing countries may be scattered, inefficient, or altogether lacking.
Sometimes local customs can greatly restrict how a company distributes products in global markets.
- View
One of the major trends is disintermediation. Why are companies turning to this? What are the primary advantages and disadvantages associated with disintermediation? Under what conditions does it make the most sense? Please share your answers here.