Designing and Managing Value Networks An PDF

C H A P T E R 15
DESIGNING AND
MANAGING VALUE
NETWORKS AND CHANNELS
S u c c e ssfu l v a lu e c re a tio n n e e d s s u c c e s s fu l v a lu e d e liv e ry . H o listic

m a rk e te rs ore in c re a sin g ly ta k in g a v a lu e n e tw o rk v ie w of th e ir bust*
n e s s e s . In ste a d o f lim iting th eir fo c u s to th e ir im m e d ia te su p p lie rs,
d istrib u to rs* an d c u s to m e rs , th ey a re e x a m in in g th e w h o le su p p ly
c h a in th a t lin k s raw m a t e r ia ls , c o m p o n e n t s , an d m a n u fa c t u re d
g o o d s a n d s h o w s h o w t h e y m o v e to w a r d th e fin a l c o n s u m e rs .
C o m p a n ie s a re lo o k in g at th e ir s u p p lie rs' s u p p lie r s u p stre a m a n d at
th e ir d istrib u to rs' c u sto m e rs d o w n s tre a m . T h e y a re lo o k in g a t c u s
to m e r se g m e n ts an d ho w co m p an y re s o u rc e s can b e st b e o rg a
n ize d to m e e t n e e d s . F a ilu re to c o o rd in a te th e v a lu e n e tw o rk p r o p
e rly ca n h av e d ire c o n s e q u e n c e s .
___________
isc o u n t chain K m a rt's r is e in th e 1 9 7 0 s w as c h a r a c te riz e d b y its
blue tight specials and fam o u s fo r infe m o usj in s t o r e a n n o u n c e

m ent, Attention Kmart S h o p p e rs!" But suffering from p o o r lo c a
tions, an unfavo rab le im ag e, an d d e te rio ra tin g sa le s, Km art d e c id e d to try to

m atch Wa [-Mart's e v e ry d a y lo w p ric e s. This m ove, h o w ever, fo r c e d th e com
pany to drop the w idely d istributed S u n d a y n e w s p a p e r circulars that p r o

m o te d sa le s an d d ro ve sto re traffic, Ev en w o rse, a terrible rep len ish m e n t s y s
tem also re su lte d In n u m e ro u s h o t se/fers bein g Out o f stock. K m a rt fifed for
C h a p ter 11 b a nkrup tcy on J a n u a r y 22, 2002 , th e b ig g e s t retailer to have

do n e so up to th at tim e ,1
A Blus Light Shop M in e kiosk at Kn art.
467
-363
PART
DELIVERIN G VALUE
C o m p a n ie s t o d a y m u st bu ild a n d m a n a g e a c o n tin u o u s iy e v o lv in g v a lu e n e t
w o rk . In this c h a p te r, w e c o n s id e r s t ra t e g ic an d ta ctica l issu e s w ith m a rk e tin g
c h a n n e ls an d v a lu e n e tw o rk s . W e w ill e x a m in e m a rk e tin g c h a n n e l is su e s from
th e p e rs p e c t iv e o f re ta ile rs, w h o le s a le r s , a n d p h yska l-d isrtrib u tio n a g e n c ie s in
C h ap ter 16.
Marketing C han n els and Value Networks

Most pfoduccrs do not set) l|ieir goods tlirectly to the final users; bj&IVecn them stands a
set of Jn ttfib cd iarics perform ing a varieiy -tif fu n d ions, T hese interm ediaries constiidtc a
marketing channel (also tailed a. trade channel or distribution channel}. FormalEy, m a rk
eting c h a n n e ls are scis of interdependent organizations involved in llie process of m ak
ing ll product or service available for use or consum ption. They Lin" the set of pathways a
product or service [tllow after production, culm inating iji purchase and use l>y ilic? fins I
end user ,2
Som e in te rm e d ia rie s s u c h as w h o lesa le rs and retailers- buy, take title to, ami resell
Ute m erch an d ise; they are called iiu Tch a m s. O thers brokers, m anufacturers' representa
tives. salt's agentss c a it h for a is io m t r s and m ay negotiate on the producer's b e h a lf but
do not tsikc title to the g o o d s they are called a gen m S till o th ers tran sp o rtatio n co m p a
n ie s, in d e p e n d e n t w a ic h o ^ e s , b an ks, a d v e rtisin g sg e n e ic s a ssist in th e d i$b iLn i([o n
pBQCCSS bul n e ith e r lake title to goods HOT n egu liate p u rch ase s or sales: th ey are called
Jiicilit/tiDi'f,
T h e Im p o rtan ce of C hannels
A m arketing channel system is the pat titular set of marketing channels employed Eiy n firm,
d ecisio ns about the market mg chonnci system are among the most critical facing manage me ill. In the United States. cli;mnet mem tiers collectively earn margins ih.u account for 30
io 50 percent of ibe ultimate selling price. In contrast, advertising typically accounts for less
than 5 to 7 percent o fth efiSal price.-1Mai'kclin^ channels also represent fKaibstanilnl up purI unity cost. One of the chief roles oT marketing channels is Chi convert potential buyers inio
profltajê orders. Marketing .Channels m ust not fust sente markets, they must also make
markets 1
The channels chosen affeci llII other marketing decisions. T h e com pany's pricing
depends un whether ii uses m asi merchandisers or high-quality boutiques. "i'lie firm's sales
force and advertising decisions depend no hqiy much training and motivation dealers need.
In addition, channel decisions involve relatively long-ierm commitments to other firms as
well as a set of policies and procedures. When an ait to maker signs up independent dealers
to sell its automobiles, die automaker cannot buy them out the next day and replace them
with com pa n v owned outlets .1
In managing its intermediaries, the firm insist decide Ekhv much effort to devote to push
versus |jull marketing. A push strategy Involves the manufacturer using; its sales force and
trade promotion money m induce Intermediaries to carry, promote, and sell the product to
end users. I'nsh strategy i i appropriate where there is low brand loyaity in a category, brand
choice is made in the store, (he product is an impulse item, and product benefits are well
understood. A pu ll strategy involves die manufacturer using a d v e r tin g and promotion io
persuade consumers to ask intermediaries for the product, thus inducing the intermediaries
to Order it. I'ull strategy is appropriate when there is high br^nd loyalty and high involve*
ment in the category, when people perceive differences between brands, and when people
choose the hrand before they go tu the store. Top marketing companies such as Nik*1, Intel;
and Coca-Cola skillfully employ both push and pull strategies.
U E S I G K I W A!VJC> M W A G IM G
value
NETWORtUSS A N D C H A N M E L S
Channel D e velo p m en t
A new firm typically stu risu so local up eri'tim i .filing in a limited market. using existing
intermediaries. The number o f such intermediaries is apt to be limited: ll few ttianufiatiLirers' sales agents, a few wholesalers, several established retailers. .1 few [tutting companies,
and ;i few warehouses. Deciding 011 itio best channels might lo t be a problem; the problem
niighi be to co n vin ce liic available intermediaries 10 handle the firm s line.
irtb fiflrm is successful. it might branch intn new markets and use different channels in
different markers. Iri sm aller markets, (lie firm might sell directly to retailer*; in larger mar
kets, ii might sell through distributers Itl rural areas, it 1 nigh I work with genera I-ô rid s meteliams: in urban areas, with lim ited-line morel 1an is. hi tine part of the country. it might
grant exclusive franchises; in another, it might sell throng] 1 all 0 nr lets willing in handle die
m erchandise. In one country it might tisc international sales agents: in another. it mighL
partner with a local. firm In short, die channel system evolves In response to local opportu
nities and cmnliriniis.
Tills entrepreneur started by developing channels in a small niche ami ihen expanding
slowly into new chan n els
SEAVU
ENTERPRISES
INC.
Seafu is liking a ?Vow and steady approach to channel d-evel-ap-mcnt. lor its ivioneeanq product Petrotecti Odor
Eliminator." Designed to eliminate the odors Mint pels generate from wet doggy smell lo kitty Utter Cox
aroma Sflnjletti Odor Elintiralor was first so d across the country at small pet specialty retailers and kennels,
through breeders, and animal rescue centers. Once it established a reputation in these specialized channels and
gained some publicity, SsalV signed a contact with the huge PetSmart chain SeaYu^s product will first begin
selling only in PetSmart's mail-order catalog and men will be rolled out to its retail locations. In the meanltme.
customers hjrwE oiircn ScaYu feedback Uiatlha producl 10: only ftHmlrates oft oriors, bur is also useful tor clear'
ing the air of other annoying smells sucn as bacon cooking or cigarette smoke. SeaYu plans to eventually
broaden distribution m!n other markets like housewares and Hie autnmnlivealserrtiarkul. lhis. in torn, could lead
1
to deals with larger discount chains such as Wal-Mart ci targetr

T o days successful com panies are also M ultiplying ilie num ber o f "g o -io -in *rk ef flr
h ybrid ch a n n e ls in any one m arket area;
a IBM uses its sales force to sell to large accounts, outbound telemarketing tu sell 10
medium-sized accounts, direct mail with an inbound number for small accounts, retailers to
sell to still smaller accounts, and the Internet to sell specialty items.
Charles Schwab enables its customers to tin transactions in its branches, over the phone,
or on the Internet.
m Staples markets through its traditional retail ch an riel, a direct-response Internet site, vir
tual mnils. and thousands of links on alllUateil sites.
Com panies thin manage hybrid channels must iiiiite sure these channel* m irk iyc(|
together and match each target customer's preferred ways of doing business. Custom ers
expect channel integration, characterized by the following features;
rs H ie ability to order a product online anil pick it up at a convenient retail location,
a
I he ability to return an o n lin e -o rd e re d product to a nearby store of the retailer.
The right lo reccivc discounts based on total online and offline purchases.
"Marketing Memo; Mu hi chan riel Shopping Checklist" offers so me concrete advice 011 chan
nel integral ion. Here's n specific example of a com pany that has carefully managed its m ul
tiple channels.
f?E I
Wnat's more frustrating. Buying hiking hoots that cripple your 1eel nr trying an the perleci hiding boots only
to find fiat fhc store is oul ol slock ia the si/e or style yo-u want? At Recreational Enuipmenl Inc. 1REI1, out'
door enthusiasts can easily avoid both frustrations. In 59 REi stores across (he country, customers are light
ing up gas staves, pitching tents, and snuggling deep into sleeping bags. Ff an item ia out ol stock, all cus
tomers need do is lap into the store's Internet kiosk to order it (rom REl's Web site. Less internet savvy
C H A P T E R 15
449
-170
PART
D ELIVERIN G VALUE
MARKETING M EM O
During Itie ?PD3 back-lo-school season, lhe G'lail Hf) group, an
e-commerce consuEling Ann hn Chicago, sdrrt mastery shoppeis 10
i* sit retail localonsol 1G c 1.i Icrs 1o 1es( liieir cla ms cl an iriegraTcd
stKjppiriq tifGflficnce in. tiw Qrttlnefteteil returns process. O'^raU, lte
study found ibat AA petcent ol in-store reitirns or merchandise purcfiasefl online required a store manager to override me retail system
in order to accept me teium. In response to (h:s and several Qiher
inadequacies revealed by the study, me 9-ialHng gj d'jp created a
Best of Bfeed Multi-channel Shqpp^Q Checklist" lo noip irsrketers
Better integrate online and offline channels:
M U L T IC H A N N E L S H O P P J N G C H E C K L I S T
*j Provide an inlortiLOlran centEr that is easy to navigate and

includes contact inforffiaticn, FAQs, guarantees. retunn policies,
and tips tar lirst-lmie ciKtomfra.
Smptemsifi a store iagaior tenure mat includes slots locations,

Hours, and events
Make slorc r.efcup tor purchases an option and include reai-lrme
inventory levels, wftere applnvilile.
- Post the store's nmetJy circular online lor a mere compete multehannel PKperujnce
1 Olfcr gift cerliltcales lhal (an be retJcemod online and offline.
1ratn all sioru associates on processes for online merchandise

returns.
List your company's 3 DD nurriftflr on the Web hofiiepiagt, and
be s-jrn your customer service hours of operation -ire easily
accessible
Ewd e-mail notihcalioms ol life order. Japping, and return crtîr.

include a lDmirider ct (he returns twacess in notitoticns as weti
as a link to your store locator.
Suppy all perlinenl/compatibte information for store relurn ol
merchandise on toe packing sJip or invoice.
Sown* FwxmlHiiifoni Itellle M^rnman Wuili-Diaimei Marteitss Earn a C-' on Returns," feijeJMartie.'viffjpetotja 30031
15c-
cjstomtrs can even get clerks In place line order for Uiem (ram lhe checkout couplers. Far tts seamless inte
gral ion ol retail store, Web Site. Internet fciosks, mail'order catalogs, value-priced outlets, ana toll-free order
number, REt has htEn named today's lop multichannel marketer by Forrester Research. And HEl nut only gen
erates store-to fniernet traffic, it also sends Internet shoppers into its stores. II a customer browses REI's site
and sôps Id read an PEI Learn and Share" arlicfe an backpacking, the srte might highlight an m-store promo
on hikinca bools, Linking all its channels has produced uulslaml nn resuHs: In a J^-rr.prith. pcr.od HEI lound
that dual-cnannei shoppers spent 1 14 perccnt more lhan single-channel ones and !bat (ri-channel shoppers
u
spent 43 percEnl more man dual-cJiannel shoppers,3

Ditti'ifiit consumers. however, have different deeds during lI il- purchase process, Num,:> and
Ctspedesarjrue lhat in in;my markets, buyciS fail into one uf four Categories ''
1, Habitual shopfMrrs
Purchase from the same places in the sam r nlanncr over mne.
2, Hifih valuedent$t>ekm^- Know their nrfitls ami "charnel su rf' a E*rL.Mi deal before buy
ing at the lowest possible price.
3. Viiriefy-lQvttigsfioijpers - Gather information in m any channel^ lako advantage of htglv
(ouch services, and then buy in tlieir favprllc channel, regardless ofprice.
4.
Htjjjfi-iavolvenieui Shoppers - Gntlicr

;g Itnv-'cost c h a tin d . turt rafee
iiil& ntiation in ^Jl ch an n els, m ute liieir purchase in

of cu sto m er support I'mm a hlgb-TOuCb charmeJ.
The same* consum er may CfiOdSc hi use dlfTercm clianruHs for dUTercm fnnciion^ in mnkitijjft puncliase. A consum er may choose to bfovvse tlirtju^h a cainlug before irisiiin^ u si ore
Or iflkc a lest diive ni a dealcr h iln re: oixiciiiit; a car un!in<
.
Consuincrs niayseelcdillereni types q( i:thiiinels,dc|]ending o n lh c p:irLii'Likir types of goods
Involved. Some consumers aeu hillin^ t "trarJe up' [+) re[;]i]fitfSd(TerSrig higher-end ^(jurl^sucli
as TAC I leuer watches or Callaway golf clubs; these saniL* consumers art1a!sn witling to "trade
down" to dfccGimL relailLTS tu tuij1private-1ahel pjptTlcHvcIs, dclergc'nl, ur viuiinins.10
V a lu e N e t w o r k s
A supply chain view of a firm sees markets ^ d estin ation points and amounts to a linear view
(jI lIil1flow. The com pany should livsi think o filic target marker, however, and [hen dc-s.ij.^'i i Ir
Supply chain bnckward from chat point This view has Ijc an catted demand c h a in planning
Northwest cm's Don Schultz sjivs: "A demand chain nianageiMcnt approach doesn't just push
things throLi};h the System, It jj^nphasE/cs uhat solutions consujncrs Lire looîn^ for. not wlint
DESIGN IN G a n d MANAGING VALUE NETW ORKS a n d CHAN NELS
CH APTER IS
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products w 6 a rc trying to sell th e m .' S chu tt? has sugges^ d ilia l the (in d itio n a l m arke tin g
"four P's" be replaced by ;i new acro nym , SIVA, w h ich stands for solutions, Info rm atio n, Value,
|ind ,ic c c ss,!|
An even broader vie w sees a com p any at die ce n tcr o f a v alu e nemoik-tîu system o f p a rt
nership!; a n il a llia n ce s d ia l a firm creates to so urce, augm ent, and deliver* iis o fferings, A
value netw ork ijid u d c s ii firm 's sup pliers an d iis sup pliers' su p p lie rs, and iis Im m ediate c u s
tomers and their end custom ers, T h e value n etivo rk Includ es valued relaiio tis w ith otliors
such as u n ive rsity rescartSbers and governm ent approval agencies.
A co m p any needs io orchestrate these parties to enable ii to deliver sup erior value tn the
target m arket. Palm , ih c lending m an u fa ctu re r o f h andheld devices, co nsists o f a w hole co m
m unity o f sup p liers and te sem b le ts o f sem ico nd ucto r com p onents, plastic cases, L C D d is
plays, and accessories; o f offline an d o n lin e reseller^ and o f 1175.00(1 developers Who have
created over 21,000 softw are program?: an d IOC h ard w are addT-nns lo r die Palm o p erating
systems for hand-held com [inters, and sm artphones.
D e m an d C h ain p la n n in g y ie ld s se ve ra l in sig h ts. f i r s t . the c o m p a n y c a n e stim a te
w hether m ore m o ney is m ade upstream nr d o w nstream , in case it m ight w an t to integrate
backw ard or fo rw ard , Scco n d , the c o n ip a n y is m o rs aw are o f d istu rb a n c e s a n yw h e re in
the s u p p ly Chain that m ight Cause coals, p rice s, or su p p lie s to chang e su d d e n ly, T h ird ,
co m p anies can go o n lin e w ith th e ir b u sin e ss p artn e rs to c a rry on faster and m ore a c c u
rate c o m m u n ica tio n s, tran sactio n s, and paym ents io red uce co sts, speed up in fo rm atio n ,
a n il in cre ase a ccu ra cy . W ith the ad ve n t c f th e In te rn e t, c o m p a n ie s are fo rm in g m o re
n u m e ro u s and co m p le x relatio n sh ip s w ith o th e r firm s. To r exam p le, f o r d not o n ly m a n
ages n um ero us Supply c h a in s , hut also spo nso rs or tran sacts on n in ny H!iii W ell sites and
exchanges as needs a rise .
equipment: a prini ad nffli p outran and
an 8DO number lor ptiocie calJa.
PA (ft t>
472
D ELIVERIN G
(a) Number of contacts

VlKC = 3 .r i = a
ib ) H u m b e r o f C o n ta c ts
M*C=3*3=6
M - Manufacturer
C =CU5lomBi
(1 = Pistnhutflf
FIG.
Managing this value network has required compantes to make increasing Invest merits in
information technology (IT] am! software. They have in\,jt.,,di such software (Inns as SAP and
Om clc 10 design comprehensive enh'fpfise I'ootirre ptarmfa# (ERP) systems IOmanage cash
How, manufacturing, hum an resources, purchasing, and oilier nifijor functidfls wtltiin a uni
fied fram ework ITiey !io|n' to break up departtrtcrit siios and curry o ui cqrc business
processes more seamlessly. Jn most cases,, however, companies are still a long way from truly
comprehensive ERP systems.
Marketers, lor their part, have traditionally fpcuscd on ihe side afthey^ lue network cha.1
looks toward the customer. In the future. they will increasingly participate in and influence
their companies' upstream activities and become network managers, not only product find
custurner manager!;.
l i t The Role ol Marketing C hannels

Why wttfild a producer delegate sumo of ihe selling job to intermediaries? Delegation means
relinquishing some control over how and to whom ihe products are sold. Producers do gain
several advantages by using finer media ric$;
60
VAL'dE
15.1
W rit a DisUiimis! Increases E fkien cy
Mfitly prod ucers lack the fin a n c ia l resources in c a n y out d ircct niarkvtttig. for example.
General M otetssells tis cars through teore than ii.OOO dealer outlets tn North America alone,
Eveh tlencral Motors WOllld he haid-prfcSSed to raise the cash lo buy Out its dealers.
rJ Producers who da establish (tfetroa/ncJrtintHttscan often earn a greater return by increas
in g tm vst w e n t h i theifittahi business. it a company tarns a 20 percent rare of return on martii fact u ling and a 10 percent return mi retailing, ii dues nor make sense to dr) its own retailing.
h in so m e eases d ire ct fa ttrk etln g s im p ly is n o t fe a s ib le . 1he William Wilgtcy J r. Company
would nor find ii practical to establish small retail gum shops throughout the ivorld or to sell
gum by in ftiI order. Et would have tn sell gum along ivi th m any ui her sm all products and
tvould end up in the drugstore and grocery sture business. Wtigley Hods it easier in work
through l[ie csttrtislve network of ptJVEifdy owned distribution organisations,
Interm ediaries hoftp ally achieve superior efficiency In ma|&ig goods widely available
and accessible to target markets, I hrough their contacts, expctience. specialization, and
stale o f operation, intermediaries usually offer the firm more than ii tan achieve on its own.
Accnrdirtgtp Stern and his col leagues;
Intetfncdiiries smooth the Ita v of goods and services,. . . T h i s procedure is neces
sary in order in bridge I he discrepancy between the assortment of goods and ser
vices generated l>y the producer anti the assortment demanded h\ the consumer,
t h e discrepancy results from ihe fact that manufacturers typically produce a large
quantity of a limited variety o f goods, whereas consumers usually desire only a lim
ited quantity of n wide variety 0 f 0 ods.IJ
Figure 15.1 shows one major source of cost savings Lisiog intermediaries. Part fa) shows
three producers, each using direct marketing to rc.tch three customers. This system requires
nine different contacts Pun
shows the three producers working through one distributor,
who contacts the threrL customers. This system requires only six ermtaeis. In ihis way, inter
ior: liar irs reduce the number of contacts and ihe work.
C hannel Fu n ctio n s and Flo w s

A m arketing channel perform s tire w ork o f m o vin g goods fnom producers to consum ers, [t
overcom es the time, place. and possession gaps thftl separate goods a n d services from those
w ho need or w ant ihem . M em bers nf the m arketing channel p erfo rm a n um b er o f key fu nc
tions (sue Table ID. 1}.
Som e fu n c tio n s i p h ysic a l, title , p ro m o tio n ) co n stitu te a f o r w a r d f l o w a t a c tiv ity from
the c o m p a n y to the c u s to m e r; o th e r fu n c tio n s (ordci^fjg and p a y m e n t) c o n s titu te a
b a tk w tir d f lo w from c u sto m e rs to tile co m p au v. S till o th ers [in fo rm a tio n , n eg o tia tio n ,
fin a n ce , anti ii^k taking) o c c u r In both d ire c tio n s. Five flows are fru stra te d in Figu re 15.2
lo r thi.1 M arketin g o f fo rklila trucks* If these flo w s w ere su p erim p o sed in one diag ram , the
ire m e n d o u s co m p le xity o f even sim p le m arketin g c h a n n e ls w ould be ap p arent. A m an u
fa c tu re r S e llin g u p h y s ic a l p ro d u ct a n d s e rv ic e s m ight re q u ire three c h a n n e ls : a sales
DESIGN IN G AND M ANAGING VAL 'E NETW ORKS AND CHANNELS
C H A PTER 15
.17 2
T A B L E 1 5 -1
i Galher Iritorntebr about potential and current customers, competitors. snrt oiher ad<*s and forces in the
mariteting envifonmwit.
h
a .. ; .
Develop ^no disseminale persuasive oommunicffllim 1o slimjlals purchasing
rtsacn agreements on price anil other terms so t t f ttansfet ol ownership or possession can be effected
Place ofdets witti menulactuncfs
Accjuire the fundi 1o finance inventories at diKereni lew is in ine maiKethfl enamel.
Assume risfcs connected rtiin carrying owl channel work.

n PnwltJs Jar the s u c c e s s storage artf movemenl of physical pfoducis.
it
Prcvirle lor hiryers' payment of tJieir hills inrough tn h .i and other 1 nanoai inslilulwis,
m Orasee actual iransfer o' mwierefii p Irom ore orLianialion or person to anotter.
channel, a deliver}' ciiarttitil. and a *cntitr i-ltanml. To sell its BOWflex fitness: equipm ent.
11ic Nautilus Group has used television inlbnuTci.Tl^, the telephone. and (he Internet as
njiles chfljrtncEfi; i IPS ground scrvicc as the d d ivcry channel; ;ind local repair people as die
Service c lianncI. When sales failed to meet goals, Nautilus added retail stores to its
channels in ^00j5. When a com petitor inti iftgod tin the JSmvlios patent by plating nn jmlMtion prod not Into retail stores. Nautilus began selling Bowflex home gyhris thru ugh the
remit channel*
The quest ion is not jrfa'f/^rvanouschannel functions need in he performed they must
lie bm fjulHT, who is re perform them. All ctwUJlel functions have three things in comm on:
They use up scarce resources! ih^yenn often be performed better through specialization;
and they can be shifted among channel members, When the manufacturer shiln; some functinns to irur-rmediaries, the producers costs and prices are lower, but the intermediary' must
ridel a charge to covet its w o rk . If the intermediaries are m ure efficient th an the m anufac
turer, prices to consum ers should be lower. If consum ers perform some functions theflftncK'os, they should enjoy even lower prices.
2 . Title F lo w
j- 'jp p ii^ r s
P f la jiiiis c n u r s r
D e a fe re
C u sto m e rs
1. Pa/mtnt flam
Suppliers
Banks
Banks
Dealers
Transport:^,
w3fflftlU5(S,
Oanks
Ue?ifts
Baifts
Cuslflimtis
Transportals,
banks
C u s to m s ts
4 .Information Flow
f------ -----Suppers
TraiypOrtEJE.
warc-lHLists,
banks.
li?
M;....
IF
S. Pfomolron Flpw
Suppliers
F I G . 1 5 .2
Advertising
agency
Msmijtciurflr
AdvertiSi-nijag en cy
i Itc fi-dihellngflows In tlin '.Lr-- imy Cl an t !l (or Fur- H <rncK^
~ n ___
Dealers
C U jt o n w s
174
PART 6
D E L IV E R IN G VALLIE
Marketing functions. then, are more basic than ihc institutions that p e r Its iiti tjicen to any
given time. C h a n t s in channel institutions largely reflect the discovery of more efficient
ways tn com bine or separate the economic functions that provide assortments of goods in
la r g e t
c lis < o u t e r s .
C hannel L e v e ls
The producer and the final customer are pari of every channel, We wfll use- the- number of
interm ediary levels to designate the length of a channel- Figure 15.3(a) illustrates several
constimer*ioods marketing channels of different lengths.
ft zero-level channel lalsn called a d lTcct-m atkctln g jchan n d ) consists of a manuracturer selling directly to ibe final custom er. The major exam ples arc door-to-door sales,
home parties, m ail order, lelernarkeiing. TV soiling, Internet selling, nrtd nianufneturerowned storey Avon sales representatives sell ce.smctlcs dtior-ta-dadr; Tuppcrware repre
sentatives sell kitchen goods t lirough hornr parties; Fran klin M int sells collectibles
through m all order; AT&T nseS the telephone to prospect for new custom ers o r to sell
enh an ced services to existing custom ers; Tim e-Life se lls m u sic and video collections
through T V com m ercials or longer 'infom ercials1": Red Envelope sells- gifts online: and
Gateway sells com puters and Other consum er elect lo [ties through iis oWd stores.
'M arketing Insight: M -Com m crce Opens Up New Opportunities fur Marketers" describes
new developm ents in that area.
A oiit'-teivl channel contains one selling Intermediary, such as a retailer. A iu 'd J l'iv I chnnnel contains two intermediaries, In consum er markets, these [ire typically a wholesaler arul
a retader. A three-level channel co mains three intermediaries, In ihe meatpacking industry,
wlitilcsalets sell to jobbers, Who sell lo small retailers, hi Japan, food distribution niSy involve
as m any as sis levels. From ihe producer's point of view, obtaining in for mat ion about end
users and exercising control becomes more difficult as the num ber of channel levels
increases.
Figure 15.3(b) shows channels com m only used In Industrial marketing. An industrial'
goods manufacturer can use its spies force to sell directly to industrial customers; or ii can
sell to industrial distributors, who sell to the industrial custom ers; or it can sell through
m anufacturers representatives nr iis own s=iles brunches directly to industrial customers, or
indirectly in industrial cu si outers ih rough ituhtstrlal distributors. Zero-, one-, and two* level
marketing channels are quite common.
(a) Consume r MiirVttnnj ClisruuHt
|b> Industrial Marketing Channels
0 Il' v l I
t-level
2-fevel
3-ICvCl
0 - le v e l
1 - JC v d
2 Itu - il
3-lauti
r / n r iu la ;lu r e r
Manufacturer
M a n u f ic iu r e r
Manufacturer
M a n u tjc ti;::.'
Manufacturer
r.1attulat lurur
Mdnnlsciumr
Manulaclurer's
reprsseriisii^
ManufadidSr'S
sales Orsncti
r
W h o lE
5 S lW
Wholesala
Jobber
Consortia
FIG.
15,3
Retailer
R e 1s H e r
,
Retailer
Consume
C o n su m w
C o nsu m er
Consumer amt Industrial Matkelsng Qianncis
iM L llJ iV lJ ll
tjlE-1r<DulDf
ndiEtjiil
customer
Indualria]
industrial
cjstnmef
customer
leidusihai
uistorrBf
D ESIG N IN G AND M ANAGING VALUL NETW ORKS AND CH AN N ELS
Consumers ant) businesspeople no longer need to be near a cam

puler to Sdrsd and rcceive inlnrmation All tfi-ey need is a cellular
phone or personal digital assistant 1PDA.1 Whl|# mey are on llis
move, they ton connect vvilTi lhe Internal to ch*ck StDO? prices,
the weather, sports scores; send and receive: e-mail messages;
and ptace wiflns orders. A whole lield: caned lelem a)t& invottres
pipe ng wireless Ir.Lifrncl-qonnecled computers In lhe dashboards
of cars and 1rucks, and making more boiire appliances (such
as comfMjlersj wireless so that they can he osed anywbefe in or
near lhe home. kiany sec a Ijig future in what is now Called
m-ommwsfl (m tor mobile). Consider the Iasi flrowin o1 Intemelcannected phones.
In Japan, millions; o1 teenagers carry DoCoMo phones available
Irom MTT (Nippon Te:u[>lione and Telegraph) tliey can also use
Hieir phone 1 0 a^der goods. Each month, lhe subscriber receives a
bill from WT7 listing lhe monthly subscriber iee, lhe usage lee. and
ll'.e cost or ell lhe transactions. The person can Itien pay tlie b.II at
lhe nearesl 7- 1 1 store In lhe United States. Canycrsagenl :for
merly AcitveButldy) creator Software applications that connccl
Instant Messag ng users to marketer-created daia using cdnversaliona language.
C H A PTER 15
The potential rnarkei &ppor| unities lor location bascri services

are enormous. Consider seine possibilities:
Getting a Coke by poimiog and clicking the phone ai a '.igrding
machine. The bowe drops down and an appropriate an1,aunt is
deducted Irom lhe owner's bank account.
Usmg lhe phone to search tor a nearby restaurant !hat meets the
customer's entered cnleiia.
WalcNng stock prices while sitting <n the reslajrant and deciding
lo place a purchase order.
Clicking the jihofie to pay the b ll lor lhe meal; the cellular pittne
replaces the credit care)
*
Coming home and clicking a combinai.on p! keys on the phone to

open the door.
Some see posiiive benelits, s-jch as totaling people maki'-.n emer

gency 3 1 1 calls or checking on the whereabouts 0 ' on-s's children
laJe a l nirpt Qlbers worry about ijfrvacy issues. What
11
an e m p lo y
learns thal an employee is fteing treated ler A lP S a i a fcctf clinic, or

a v:ife finds cot her buShand is oul cluhhinfj? Like sa many new tech
nologies, location-La^^hd services I w e iwtentia) lor good or harm,
and ultimately wil'i wanartl nutîc scrutiny sT.d r?guJafloo.
Ssdtfflfr Douglas LSinont. Comteri'$ rîr>Wtotttt VftrtS The Aye flr Ki-Cpm^tsa (Mpv Vork: W^y, 20011 ftfac Wsiivjafien, 'live Wettum Is 1I14
iitsiam Message," Bus-.'vss 2.0. Feûary 2002. uu 58-03.
Channels normal!} describe a forward movcuieift I products from source Lo user. One
c liii ;ils u u lk about r e iv r s f f^ flo w chfiitt/Hs.They are important tn 11so following cases; [ 3} to
tcusc products or containers (such as rcliliable chemical-carrying drums); (il) to rrfuvtnslt

products [such as circuit boards or computers) for resale; (35 to recycle products (such as
[KiptT); and 14) indispose nf products Kind p ild t n g in g ^ S c products], SevernI iritcrnjcdiaries
pin;' :> role in tuVersC'flljw clianncls. including manufacturer!'' redemption renters, com m u
nity groups. traditional (nterm ediarics such us soft-drink Interm ediaries, tra sh e d le ctio n
specialists, jetyding centers, trash-recyclingbfcikeE^ and centr^-jirQcessing warehousing,11
HEWLETT-PACKARD
Each month Hewlett-Packard, Itie world's second-largest computer maker, sends 1.7 million tans dl brokendown and uiwarted electronics tn tfeet the r enn -or their new beginning a1 its Roseville. Cali'orn;a. recy
cling center. Yet the company, In conjunction with recycling partner Noranda Inc.. sltli only recycles less than
1 percent of the h ayw ire il makes. Pressured by complaints aboul Haw they djspuseot products rneiLrdiny
shipping old machines lo be broken dOvrn in Asian countries with less stnci environmental lahvs computer
makers have i pined with the EPA. environ menial groups, and a nonprolit group calleo Product Stewardship
Instil ule. These groups created the NatlonHI Electronics Product Eiteârdshi p tnitialhe, but 1he process of c reatmg a nationwide recyclmg standard is incredibly slo^ Without a syslem n place. Electronics makers hke HP
and Dell have launched inventive PR campaigns to spur the public to recycle. On Earth Day 2003. at a
SlarDuCkS Support CtnlEr in Seattle and lhe 101lowing day in New York's Grand Central Ternnnat, HP accepted
computer hardware made by any manufacturer and recycled it at no charge. HP also boosted lhe incentive tor
consumers and small businesses to hine HP to recycle old PCs ana monitors through Its recycle-by-mail pro11
gra m. which cosls St 5 to $46 dependi ng on the siie of the cguip me nt.1;
57S
ilt
PART 6
D ELIVERIN G VALUE
S e rv ice S e cto r C hannels

MiU'ki'linj channels are inn limited in [Lit.- distribution of physical
good!, Producers Of scryitcS tind ideas ttlso Fact' the prdbltSn of
making their output available and accessible to target jpbpulai in ns. Schools develop Vûcail6ina^4tsseminaLlon systems ;md
lios p j <ii Ia develop health-delivery system s. Lb esc institutions
must Figure out agencies and locations fur reaching a population
spread out over an firca.
.M arketing c li:itin e ts a ls o keep ciia tip in j" in "p erso n" m a r
ket
Before 1340, p ro fe ssio n a l c o m e d ia n s co u ld reach a u d i
en ce s ill rough v a u d e v ille h o u ses, sp e cia l e v e n ts, n ig h tclu b s,
rad io , m o vies, c a rn iv a ls , an d I h e a le rs. V a u d e v ille h ouses have
va n ish e d and been rep laced
c o m e d y c lu b s and ta b ic te le v i
sio n sta tio n s. P o litic ia n s <dso m u st cho o se a m i* o f c h a n n e ls
m ass m ed ia , ra llie s , to ffe e h o u rs, spot T V ads, d irect m a il, hilt*
b o ard s. faxes, e -m a il. Web s ilt's for d e liv e rin g th e ir m essages
to v n te rs.ir
As Internet and other technology advance, service industries
such as hanking, insurance, travel, and stock buying and selling
are operating through new channels. Kodak offers Its customers
four different ways to print their digital photos mi nilabs in retail
outlets, home printers, online sendees with the Ofolo Web site,
and self-sepnice kiosks.|rj
Reaching the right custom ers w as n key factor In one of the
biggest financial services merger ever
CITICORP
Distribution strategy Lind ihe blsnti of differenl customer wflfnent arrets
was a slated objective of tits S70 trillion merger between Citicorp and
A customer operaies a KctJi'n ^niniiab m a fElaS outlet Min labs qFten
Travel tits Group. Citicorp was one of the world's largest be nits, while
appear <n re'j i slopes (hat also hnvo nhotn processing dctaftmaflfe
Travelers cruscd an .nsurnnce, mutual funds, and investment banking busi
nkr: Welgr^ns and CVS Stores.
nesses. One oi Ihe major stated goals ol Ihe merger was Ihe ability of each
organization to cross-sell Ihe other's products to its customers and lo exploit
the two organizations' distribution channels 1c maximize the penetration of
Ihe merger) companies' products throughout Ihe world.17
" I Chcrnnel-Design Decisions

D esigning a m arke tin g channel system involves analyzing c iis m m c r needs, establishing
channel objective;., id e n tifyin g major channel alternatives, and evaluating major channel
alternatives.
A nalyzing C u sto m e rs' D esired S e rv ice O u tp u t L e v e ls

In des^gnin^ tin: marketing chamtcl, the marketer must understand the service output levels
desired by farpei customers. Channels produce five service outputs:
1. S.ai sizv - the ntMnber of units the channel perm its a typical custom er to purcjfti&e
on oiu1 occasion, in buying cars lor its fleet. Hertz prefers a chan net from w hich Jl
can buy a large tut s iz e a household w ants n channel that perm its buying a lot size
of one.
2. I >Vr/ fi uga/ift f}$Uvery lime
I he average time customers of that channel wait for receipt
of ihe goads. Customers increasingly prefer faster a ml faster delivery channels.
!.. Spatialcotiimntence - t h u degree io which tin- marketing d ian n cl makes ir easy forctistomers to purchase the product. C h e vro le t for example, offers greater spa t l nl c o n VC-
DESIGN IN G ANU MANAGING VALL.L NETW ORKS AND CH AN N ELS
mencc iluin Cadillac, bccauSt there are more Chevrolet dealers, Chevrolet'sgreater marfcei decentralisation helps customers save tjti transportation and utrnr-r] i Co aIS in buying
and repairing ati ftijstttuibile,
proiiw t iw rfpfj^Tho assortment breadth provided by Lhe marketing channel. form ally,
custom ers prefer a greater assortment because more cho ices increase ilie chance pjt
finding what ihey nc^ l.
5. Servlet backup - The add-nn services (credit. delivery trtstaJlation, Repairs] provided
by the channel. The yrentL'c the service backup, the greater the work provided by the
ch a n n e l,*14
lh e m arkcting-diaunel designer knows thai providing greater Service outputs m eans
increased d iann el costs and higher prices for customers: Different customers have different
service needs, The success ol dtscoiifft stores indicates that msrty consum ers are willing to
accept sm aller service outputs if they can save money,
EstabEishfng O b je c tiv e s and C o n strain ts

Channel objectives should lie staled in lerm s of targeted service output levels. U nder
com petitive co ndition s, ch a n n el in stitutio n s should arrange their fu n ctio n al tasks to
minimtee total channel costs and si ill provide desired le v e lso fssry ic e outputs,39 usually,
planners can identify several market segm ents ihnt want different service Icvcfc,
Effective planning requires determ ining which market segm ents io serve and the best
channels for each,
Channel Objectives ifiiry with product characteristics. Perishable products require more
direct m arketing Bulky products, such as building materials, require channels that m in i
mize the shipping distance and the am ount of handling, Nonstandard products, stiCh as
custom-built m achinery and speciali/.ed business forms, art' sold dirrctly by company sates
iepresenialiv.es. Products requiring installation or m aintenance services. Slicll as heaths^
and cooltng systems, a re usually soid and maintained by the company nr by franchised deal
ers. I [iph-Linii'vnlue produds such as generators and turbines are often sold through :i com
pany .safes force rather than intermediaries.
Channel design m ust take Into account th C i trcngths and weaknesses of di fferen i types of
intermediaries. I:or example, manufacturers' reps arc able to com act customers at a loiv cost
per customer because the total cost Is shared by several clients, hui the selling effort per cu s
tomer is less intense than if company sales re ^ did the celling. Channel design is also influ
enced by com pelt lOrs' channels.
Channel design must adapt to the larger environment. Whejt econom ic conditions are
depressed, producers want to move their goods to market using shorter channels and with
out service? that add to lhe final price of the goods, I.egal regulations and restrictions rilsu
affect channel design, U.S. law looks unfavnrably on channel arrangements tft'at may tend tn
substantially lessen competiiion ur create a monopoly.
Identifying M ajor C hannel A lte rn a tiv e s

Com panies can choose from a w ide variety o f ch a n n e ls for reaching custo m ers from sales
forces to ag ents, d istrib u to rs, d e ale rs, direct m a ll, te lem a rketin g , and lh e In te rn e t, lia c li
channel has unique strengths as w ell as Weaknesses. Sales farces can handle co m p lex p ro d
u cts and tran sactio n s, but th ey are e xp ensive. T h e Internet is m uch less expensive, but il
H-.-immC h a rd ly a m ip lfS pirnlm
1).-I i i b i r l o i i ;ir: crealc Mill
, lu ll tin: Company ioM'S ('I ivei
contact w ith custom ers.
l
he problem is further complicated bv. rile fact that most com panies rime use a mix of
channels. Each channel hopefully reaches a different segment of buyers and delivers lhe
righi products to each at th clrast cost. When this does noi happen, there is usually channel
tunflict and e\cess)Vt: cost.
A channel alternative Es described by three elem cni si die types of available business inter
media! ies, (he number of intermediaries needed, and the terms and responsdsilifies nfeach
channel member.
..
to carry on It# channel work.
A iim i needs to identify the lypeso f intermediaries available
C H A P TE R IS
Ml
*173
PART 6
DELlVERlM C VALUE
IruinraiN'G markeliiig dianneEs Calyx and

Corolla ayis lasers throunn direct
dslivcjy /dilh a nri-nc catiln'j anti an
Cfliine store.
For example, a lest-equipm ent m anufacturer developed ;m audio device lc*r detecting
poor m cdianical connections in m achines with moving parts. Company executives felt this
product would sell in all industries where efcctric, combust ton. or steam engines were used,
such as aviation, automobiles, railroads, food cunning, con si ruction, and oil. The sales furcc
ivas small. T lie problem was how to reach these diverse industries effectively. H ie fol lowing
alternatives lYere identified;
g Expand the com pany's direci sales force. Assign sales rep re se n tative to contact all
prospects in art area, or develop separate sales forees for (Itc diffcrent industries.
Mire m anufacturers' agents in different regions ur end-use industries io sell the new
equipment.
b
3 l: ind distributors in tbiLdifferent regions or end-use industries that will buy and carry the
device. Give them exclusive distribution, adequate margins, product training, and pn:m o
tional support.
Tabic 15.2 lists channel alternatives identified by a consumer electronics com pany iliat pro'
duces cellular car phones,
Com panies should seareli for innovative marketing ch an n els Medion sold 600,000 i'Cis in
Europe, mostly via major one- or two-week 'btiTSl promotions" in AJdl's super markets 211
Colum bia I louse has successfully merchandised ntnsie album s through the mail. Oilier sell
ers such as Harry and David and Calyx ft Corolla have creatively sold fntir and floweri,
respectively; dirongh direct deliver}. (See 'Markfltfrig Insight: flow CarMax Is Transforniirtf;
the Amu Business,*)
DESIGN IN G a n d m a n a g i n g YALLiE n e t w o r k s a n d CHANNELS
CHAPTER as
T A B L E 1 5 .2
Tne company could sell its car phones 10 automatmle manulecturas lo be installed as mginai equ pment
Praruffll Aitemli'tfK for a Cellular
a The company could sSI its car phones In auto beaters
Ciu Rime Makar
The company coulri seh irs csr dflones lo retail auUxnotrve-equjjOfAdAI riealers torcugh a dined safes 1orce
Dr inraugh dishirtJois.
Tne company axiM seir its ce* phones to cai phone specialist deates through a duecl sales force cr dealers.
b.
Ihe company could sell ils car phones lhrtjuyh mail-order catalogs.
q The ccTtpany could sell ils car phones through mass menciiantf-sers such as Best Buy or Circuit City.
Bank One is leuing Avon literally open doors for wider distribution or its frifdB eurtls:
5 A WK
ONE
C O R P r AVOW
PRODUCTS
INC.
A new partnership between BanSi One and Avon marks (tie lirst time a card issuer has employed another com
pany's distribution network Avon representatives as pari of an affinity program to pul plastic in mote
purses and wallets. Several factors are in the partnership's favor. First, Hie Avon reps alone make up a lucra
tive target market. Avon reps gel the same rewards as consumers when using the Platinum Visa and :hey also
reap a 525 credit toward their Avon business accounl once eacn approved customer they sign up makes a
purchase. It each rep gels jus1 one account holder signed up. lhat's 6QO.DQO cards riclil Ihene. Avan repnesentaiives and customers are largely women, anb Avon says that women control fli percent ol family pur
chasing decisions and fl& percenl of them manage the household checkbook Gy partnering urilh Avon, Ranfc
H O W C A R M A X SS T R A N S F O R M IN G T H E A L T O B U S IN E S S
3
For yeiirs. buying a used car was considered a dangtfOuS and risky
business; used-car salesmen were slock figures in comedy routines
Then CarWas emerrjed to change Ihe lace of Ihe industry and its
Standanfc. Circuit City, a major retailer of electronic pTOOUCt^. Started
CarMa*. Ihe AtJio Superstore, in 1993. The In-sl superstore opened in
Richmond. Virginia, where ils headquarters are locaied. and CarMa*
is now Ihq nation's Jcabng speciaJlv reia.ler of used cars: it operates
50 uSed-car superstores in ?-1 markets CarMar also operates
12 new-car franchises, whicli art integrated or to-located with ils
iwedcar superstores.
What is so special abnul CaiMgx?The company locates ils useecar superstores, each carrying around 500 cars, on 'arge lots on the
ojlskins of a city near a ffiajor highway. Customers enier an atlracfive 11splay room, where a sales associate finds out whal ki -.1 ol rar
they want and Ilien escorts Item to a computer 5<iqsK Usi ng a lo^li
screen the assoc Me retrieves a full feting of the cais In siock that
meet the customer's criteria. A color display of each car can be
shown alir>g with lha vehicle's leavras anti its fined sei ing price. 1 lie
company has over 15-,000 cars in all. nearly every make and model.
There is no price MQstation The salesperson, paid a coirmis*
s on on inn number of cars sold rather than Ifteir vaJue has no intfln-
Ii'.t tc push hgher-priced: cars. The customer is inform ?rl lhal

CarMax mechanics nave carried out a 1lD-poml inspection and
mstle any necessary repairs beforehand. Furthermore, a car buyer
retires a 5-day money-back guarantee and a 30-bay cooipre^n
sive warranty- n trie buyer warns financing, the CarMa* associate can
arrange it in 20 m;nules Tne entire pnocess typically lakes less man
one hour.
The company's riche has lo been to fooc on the used-car nurKel Given that today's cars are beiler and have longer 'ife expectan
cies, many buyers now prefer ;n save money by buying a used car,
and Ihe substantial growth of car teasing has greatly inflated Ihe sup
ply ol used cars. Banks are more wflSng to offer tow-cosi financing
lor used cars, especially whon research iWeafed thai qfelauh rates
vjere lower inr used-far buyers, Finally, deaers have reported earr
ing a nailer profit on used cars, up to Si 00 more Ihan ?nr a new car
CarMa* has txsn very successful in thieving even greaser mar
gins: The company's average selling p ice tor a used vehicle is $15,00a
and Ils average profit margin is 13 percent, compared with Industry
averages of S I3,650 and 11 percent, respective Although the maid
auto mikes experienced a rieclin-; m sales and pfttitaMity in 2DG3
wilh new cars. CarMax experienced sales and revenue growth
Sorces GrcOT J ^-gsn.'CirfvKQiyS CarliSa*SuwslorKPass S3Cv >i(mmYes: salw.' Kmght-mucrî*teBvsvSS Aft.. A | i 1997,
p 19. AiSenaSawyers 'Carttes B Out ol Ihe Ren n ine Tnk. /rj.'aiMr.rfi tons, h^.i IG. ?P01 n.
Laurj Kdler, "Or l Cur; Restructurcs, Spin;
CarMw Unit/ D$u fefiiitinj TtCfji t.iacn it , kmz. pp- ^
479
480
PART 6
D ELIVERIN G VALUE
One goes dircc'ty to me parson who halite the curse strings. Tue &erLe1its go two ways, however. since the
p;irtnersh |>will spu-r lirand awareness lor Avon, "Svefy time someone takes the Aifgn card out of Ihe w^llpi,
m
il will remind them that we gie around.' says Avoti^ spnipr manager of credit card operations.21
Sometimes ii com pany
an Unconventional channel because (if the difficulty or
rost of worMug with the dom itlnnl channel: The advantage is that the com pany will
encounter less competition during the initial move into this channel. After trying to sell [(
inexpensive lim e* watches through regular Juwclry stores. il ilt LI. S. lim e Company pEiicutl
Its w atches in Hist-growing m ass-m erchandise nutlets. Avon chose dooM O-door selling
because if WHS not able to break into regular deportment stores. The COinpitiy made more
money llKtn most firms selling through department stores,
1
It
:
. Companies have id decide on the number of intermedi
aries trj use at each channel level. Three strategics are availatrttt exclusive distribution. selec
tive distribution, and intensive distribution.
E x c lu siv e d istrib u tio n m ean s severely lim iting the dum ber of interm ediaries. It is
used w hen the producer w ant? io m aintain control over the service level and pit (puts
offered by the resellers. Often it b ivalves ex$jiftsivc (feaUtrg arrangem ents. By granting
uKcluiiVe d istriliLi lion, the producer hnpe:i to obtain more dedicated and knowledgeable
bulling. It requires greater partnership between seller and reseller atu! is used in the dis
tribution o f new automobiles, some m ajor appliances, and som e women's apparel brands,
W hen the legendary Italian designer label GliCffil found its, image severely larnished by
uveresôsure from licensing and discount stores, Gtteci decided to end contracts with
third-party suppliers, control its distribution, and open its own stores to bring hack some
of the luster.22 Exclusive deals between suppliers and retailers are becoming S mainstay
for sp ecia lists looking for an edge in a b u sin ess w orld that is in creasin g ly driven by
pricc,2:i
D isney Consum er Products and yiJa1-Mn signed a landm ark pact in 2003 gi^nj; U r;ilMart a six-m onth exclusive oti sates of toys and m erchandise from Disney's new Kim
Possible franchise.
When Scholastic iintcrtainm ent rel aim cited its Clifford the Hig lied I5og kids' franchise
after leaving ii neglected for years, the com pany used exclusive deals with Target and JC
Penney to enjoy a comfort zone it wankin'? have had If the product had been Launched across
several channels.
Selective distribution Involves I ht- use o f m ore than a few but less tti:in all of the inter
mediaries who are willing lu carry a particular product. It is used by established companies
and by new com panies seeki0(5 d istributors I he com pany does not have to worry about too
many gullets; il can gain adequate market coverage with more control and less cost than
intensive distribution. Disney is a good example of selective distribution.
DISNEY
Disney sells iis videos through live main channels: Movie rental stores like Blockbuster ihe company's propri
etary retail stores, called Disney Stores; relml stores like Eesl Guy: online retailErs IkeArttajon.com and Disney's
owa enlme Disaey Stores; the Disney catalog and other cataiog sellefs. These vaneo channels afford Disney
maximum market coverage, and enabse me company to otter its videos at a number ol price points,11
Intensive distribution cous is is of the manufacturer placing the goods or services in ns
many outlets as possible This strategy is generally used lor Items such as tobacco products,
soap, snack foods, and gum, products tor which the consumer requires a great deal of loca
tion convenience.
Manufacturers are constantly tempted to move from exclusive or selective distribution
to more intensive distribution to increase coverage and sales^Tliis strategy rutty help in the
short term, but often hurts long-term performance- Intensive distribution increases prod
uct and service availability but may also result in retailers competing aggressively. If price
wars ensue, retailer profitability may also decline, potentially dam pening retailer Interest
in supporting the product. It nuiv also harm hrand equity, as the Calvin Klein experience
Illustrates,
DESIGNING AND MANAGING VALUE NETW O RKS AND CHAN NELS
CALVIN
C H A P T E R IS
431
KLEIN
Ln May 2QQ0, design erCalvm Klein sued Linda W^chner. CEO of Wamaco Group Inc . Tor selling His jeans to culrjile, mass-market ouiieis wlHiaui h=s permissfon Wamaeo, which has ifie license to make and distribute Uie
jeans. v;as aceegeci Jjy Calvin Kiejn p( milking Iswer-ClUîty |e^ng for |he? Outlets, and Iherefore hurting his
imatfS The suit was setttEd out of court in Janjaiy 2001, and both sides said they "look forward lo expanding
[pans wear sales consislenl v/ith the imacjE anc preslrge q! Calvm Klein products." Vfcrnaco vrou ri limit distnbi
tiling jeans wear products 1 department nmn speedily siori?^.

TERMS AND RESPO N SIBILITIES O F C H A N N EL M EM BERS T h e producermtlSLdetermine
the rights and responsibilities of participating channel members* Each channel m em ber
qniisi he treated respcctfutty and given the opportunity to be p ro R ta b le ^ T b e trnajji t?lements In the trade -retat i ons m iV are price policies conditions of sate, territorial rights, and
specific sMVitcs lo be pur Turin ed by each party.
Price policy calls Tor the producer to establish a price list and schedule o f d isc o u n t and
allowances that intermediaries sie as equitable and sufficietu.
CbticlUions of sale refers m payment terms and producer guarantees. Most producers
grant Cii^li discounts to distributors fer early payment, Producers niigjii also provide distrib
utors a guar'antcc against defective merchandise i>r price dec lints. A guarantee aguinst price
declines gives distributors an incentive to buy larger qu^ntines.
D is trib u to rs' te rrito ria l rig h ts define the distrib uters territories and the terms under
which the producer wiP enfranchise other distributors. D istributors norm ally frxpect (o
receip t' full credit for all sales in their territory, whether or not they did the selling.
M ututtl sendees a n ti resp on sib ilities must be carefully spelled out, especially in franchised
and êehjsiveâgency channels. M cD onalds provides franchisees with a building, prom o
tional support, a recordkeeping system, i raining. and general adm inistrativearid technical
assistance. In Him. Franchisees aie expected to satisfy company standards regarding physi
cal facilities, cooperate w iig new promotional programs, fuinish requested Inform ation,
and buy supplies from specified vendors,
Evaluating th e M ajo r A ltern a tfv es

Each channel alternative needs to be evaluated against economic. control, and adaptive
criteria.
iiach channel alternative wilt produce a different level of sales and
costs. Figure 15.-1 show1' how
different sales fla n n e ls stack up in terms of the value added
jjer sale and the cost per transaction. For example, in selling industrial products costing
between S2rnnfl and 55.000, iIn; tost per transaction has been estimated as S5Q0 (field sales},
High
F I G . 1 5 .4
Ths Value-AfWs Versus Costs <jl Diluent
Chanwte
SjUtt. Chrjrd ASSiflHB, n-i.y.;t.J fiom
D1 ttavmnii 1 MrifiiUiY, Cul-jj ton
Lwi
Low
High
CoSl per Transaction
JS 3
PART 6
B E U V E R lN B V A L U E
530Q <;[isirihLi|f>ss-j. S50 [telesales), attd SKI (hljfemut).Banks claim that in sell Eng retailLank
in g services, the cost pefc.transaction is S2 (teller). S,5t> (ATM), find S.. 10 (Internet). ('Iearly,
selEers would try tn re p lu g high-costchannels with iow*cost channels when the value added
per sale was sufficient, The lower-cost channels tend tn he (ptv-touch channels. This is nut
important in o rd erin g cotliModUy items, but buyers wliu arc shopping for more complex
products ib*y prefer I ugh-touch channels such its salespeople.
Whe n sutlers discover a convenient lower-cost channel, they try it) got their custom ers
to u sf it. The com pany may remind custom ers far switching. Many airlines inlllally gave
bonus frequent QJer mileage awards when custom ers boowni reservations on line. Othei
com panies may raise tlie Fees on custom ers using thcLr higher-com channels to get thcrtt
to switch. ( "ompanies i hat arc successful In snatching tlicir custom ers to lower-cost chan
nels, .is-siim in ^ no loss ol' sides or deterioration in service quality, w ill gafn a ch an n el
advantage.*6
As an example of an economic a nalys is of chan ncl choices, cons ftler tEi c followi ng sit ti atten:
A \ u ii] i Carolina furniture m amtfaelurer wants to sell its tine to retailers on the
West Coast. The m anu factu rer^ trying to decide between two alternatives; One
calls for Miring 10 new s;iks representatives who would operate out of a sales of Ike
in San Francisco. They would receive a base salary plus com m issions, The other
alternative would be tn use a Sun Krancisco manufacturers' sales agency that has
extensive contacts w ith retailers. The agency lios 30 sale.1; representatives, who
would reed ve a c o rn mission based on their sales.
The first step is to determine whether a com pany sales fotcc or a sales agency will pro
duce itKire sales. Most marketing managers beliefs that a company sales force will sell more.
They concentrate on the company's products; they tire better trained to sell ihuse products;
they are more aggressive because their hit L ir e depends o u tlie company's success; and they
are more successful because m any custom ers prefer to deal directly with the company.
However, the sales agency could conceivably sell more, first, the agency has 30 represenialives, not just 10. This sales force might be just as aggressive as a direct sales force, depend
ing on the comm ission level. Some customers prefer dealing with agents who represent sev
eral manufacturers rather than with salespersons from one company; and the agency has
extensive contacts a ncl marketplace knowledge, whereas a company sales force would need
to build these from scratch.
T h e next step is m estim ate the costs o f selling different volum es through each channel.
I he cost schedules are shown in lrigme 15-5. I he liked costs of engaging ,i sales agencv an1
lower than those of establishing a com pany sales Office, but costs rise faster through an
agency because sales agents net a larger comm ission than company salespeople. The Tina!
step is l o in pa ring sales anti ensts. As l;Lgme 15,5 shows, there is one sales level (5-) at which
selling costs are the same for the two channels. Tlte sales agency is thus the better channel
for any sales volume below
and the company sales branch is better at any volume above
S [t. Given this information. it is not surprising that sales agents tend to be used by smaller
firtns, or by large firms in sm aller territories where the volume is low.
C O N T R O L A N D A D A P T IV E CRiTEEEA Using a sales agency poses a control problem. A
sales agency is an independent firm seeking to maximize its profits. Agents may concentrate
on Ihe custom ers who buy the most, not necessarily those who buy the manufacturer's
FIG, 15.5
Brea.K-eveii CusL Chan !or Ite Chwotf
BslweCn a Can ipm17 S-jir^ FoCfi awi Li
'.Ijruftclurt;' s Sales Agency
Sjt
LiviE Of Sales [Dollars)
DESIGN TNG AND MANA :1k
VALl L I'JET'.VOFJKS AND CH AN N ELS
goods. Furthermore, ajjems mighi not master the technical doloils oT the company's product
rji handle its. promotion materials effectively.
To deveJpji a channel, members nmsi make some degree or commitment to each other
for s specified period of time, Jfel these com m itm ents invariably lead ro <i decrease in the
producer's ability to respond to a cftntiglni; marketplace. In rilji[illy changing, volatde, nr
uncertain product markets, ihi! producer needs channel structures and policies that provide
liigb adaptability:
!! ! C hannel-M anagem ent Decisions

After a company has chosen a channel alternative, individual intermediaries m li s.1 be selected,
i rained, motivated, and evaluated, Channel arrangements must be modified over time.
Selecting C h an n el M em b ers
Companies need t-u select dicir channel member? crarufully. 1<>customers, [ho chnnneli are
ilk' company. Consider die negative impression customers would êi or McDonald's, Shell
Oflp or Mercedes-Benz if one or more of their outlets or dealers consistently appeared dirty,
incfficicnl, or unjilcnsjiin.
To Eacfhtate channel member selection, producers should determine what characteristics
distinguish the hotter intermediaries. They should evaluate the n u m b ero lyears iti business,
other lines carried, growth and profit record, financial strength, C0 tJperfiliVenesS> and scrvice reputation. If ilie intermediaries are Kites agents, producers should evaluate (lie num
ber atirl character of oilier lin ts carried and Ihe size and quality of the sales force. I f the
intermediaries Lire department stores that want exclusive distribution, the producer should
evaluate locations, future growth potential and type of clientele.
Training C h an n el M em b ers
Companies need lo plan Jind implement careful (raining programs ff>r llieir intermediaries,
Fast-growing Culver's restaurants requires iis Midwestern fm m liisee* to work tin hours in
n iic o f d ic j restauratiis Culver owns and then work 12 -hunr days, <i days a week fcM months
ibt headquarters, learning every facet o f how O liver operates logist really and financially.-1
Microsoft requires third-party service engineers to com pletes set of courses ami take cert fftcation exams. Those who pass are formally recognized as Microsoft Certified Professionals,
and they can use this designation to promote business. Others use customer surveys rather
ill an exams.
K YO C ER A
MITA
CORPORATION
in JtHB, Kyocera Mita America commissioned J.D. Power and Associates lo develop a program lo survey
Kyocera Mila deatets1customers and certify tttoss dealers that met or exceeded national benchmarks for
sales and service customer satisfaction, Certification is based ort customer ialssfaction with an ofFite equip
ment dealer's product knowledge, expertise in machine opera lion, ability lo advise customers about their spe
cific needs, and Timely delivery at the equipment. Additional areas covered Dy (tie program are abifity to
schedule service apOOintmsrttS in a limeiy marner. concern for custom i-r needs, and cl Ear explanat'Oas of
services performed. "The J.D. Power and Associatos certification recognizes Kvocera Mita Total Solulinn
Prouder ceaiers lor outstanding customer experience, and allows them lo differentiate within the dealer mar
ketplace, helping lo contribute to increased customer traffic and higher sales," said Michael Pie&unt^ vice
presided of marketing al Kyecers Mita America. "This edification position! dealers as industry-wide leadi
ets in customer satisfaction."26
M otivating Channel M em b ers

A company needs to view its intermediaries in [In- same way it views Ms end users. It needs
to determine ivneruieciipries' needs and construct a channel positioning Such ih;u its chauriel offering is tailored to provide superior value to these intermediaries.
Being able in stimulate channel members to top peifotlftance starts iviih understanding
their deeds and wan is. H ie com pany should provide training programs, market research
programs, and oilier capability-building programs in improve intermediaries' performance.
C H A P TER 15
-1S3
43 J
PAHT 6
D ELIVERIN G VALUE
The company must corujtanfly communicate its view that ilu1Intermediaries art partners: In
,i joint effort [ satisfy end Jistirs of the product.
Produoirs vary jjrealty in skill hi managing distributor^. Channel power can be delated
as I lie ability to alter channel members' behavior so that they take actions they won IfI rim
have taken otherwise,-"' Manufacturers can draw on (he following types of power t-ci elicit
cooperation:
Cckfctve power. A manufacture! Ill rea lm s tn withdraw a resource or terminate a rel;i[Lcnstiip if iuiermediaries fail to conperaie.This p o w trcan be effective, hut ils exercise pro
duces rest'lltment llikI can gencum; conflict and lead (he intermediaries to urbanize coun
tervailing power,
tiewH rti power, i he niEinu facturer offers in 101111 ('diaries an entra benefit for per forming
specific acts or functions. Howard power typically prtidticcs. better results than coercive
power, but can Ik-overrated-The intermediaries may com e 1 expect a reward every time the
m anutacuuer want? a certain behavior lo occur.
. L e g itim a te p a iv i'K T he m anufacturer requests a behavior lIKit is warranted under the
contract. As long as the intermediaries view the manufacturer as a legitimate Leader, legiliman; power works,
Expcrl fjoiver. T lie m anufacturer has special knowledge that the intermediaries value.
O nce the expertise is passed oft n> the intermediaries. however, this power weakens. The
manufacturer must continue to develop new expertise so dint die intermediaries will want
10 continue cooperating.
- rti'feicut iiotcei.'Vhc mimu fact w vr is so highly respected tlmi in term cdiarics Eire proud to
be associated with It- Com panies such as m \ |r Caterpillar*find I lew] etl-Packard have high
referent power.-'1.
Coercive and reward power are objectively observable: legitimate, expert, and referenl
power are more subjective and dependent on (he ability and willingness of parties to recng
nize them.
Most producers see gaining intermediaries' coopeiaiinn as a huge cha Itenge.-11They often
use positive motivators, such as ht^lur margins, special deals, prem iuti is. cooperative adver
tising allowances., display allowances, and sales contests. At lim es they w'iti apply negative
sanctions, sucti as threatening 10 reduce mar
gins, slow down delivery, or terminate the rela
tionship; The weakness of this approach is that
the producer Is using crude, st ini ulus-response
thinking
More sophisticated companies tty 10 forge a
long-term partnership with distributors. The
m anufacturer clearEy Comm unicates what ft
wants fioni its distributors in the way of market
coverage, inventory levels, marketing develop
m ent. account solicitation, technical advice
and services, and marketing In formation. The
111eiuu facturer seeks distributor agreement with
these policies Eind may introduce a compensa
tion plan for adhering to ihc policies. Mere are
three examples nt successful partner-building
practices:
u T im k e n C o rp o ra tio n [ro lle r b e arin g s) has
Its sales reps m ake m ultilevel calls on Its
d istrib u to rs,
cWkJffin's com-;: m. an App e TtJail sinre. Apple s:nre; are dessfln'jd In Im a cemp.iMO
lechnqlagy .jiK't enca fnr ire cujtomdf, wfto ttas srqjss to ereryA,if>lb! pmducl la in-itt^
crossfilalions and ivorfcstaps, nan ! cvpon acJwoe.
n [)ti Io ni has a d isi l i hu tor market inj; stee ri 1lg

committee that meets regularly.
c+ Hust-Oleum Introduces a menu of market
ing programs each quarter: distributors chouse
the programs tbai lit ihelr needs.
DFIjlGi'JINCi
AMD
M ANAGING V A Ll . NETW ORKS AND CH AN N ELS
C H A PTEtt IS
.105
E v a lu a tin g C h a n n e l M e m b e rs
Producers must p erio dically evaluate interm ediaries' perform ance against SUCh st a n
dards as sales-quota attainm ent, average inventory levels, custom er delivery lim e, treat
ment o i damaged and lost goods. and cooperation in promotional and [raining programs.
A producer will occasionally discover th.il it is paying too m uch tn particular Interm edi
aries for what they are actually doin^, O ne m anufacturer lliat wait com pensating a d is
tributor forjiolding Invsrttorl-es found that the inventories were actually held in a public
warehouse at its expense. Produce is should set up functional discounts in w hich they pay
specified am ounts Tor the trade c h a n n e ls perform ance o f each agreed-upon service.
Underperform ers need 10 he counseled, renam ed, motivated,, or terminated^
M odifying Channel A rran g em en ts

A producer must periodically review and modify its channel arrangements,. Mod:ification
becomes flecessafy when [fie distribution channel is not working; ;is planned, consum er
buying patterns change, the market espands. new comp ei it ion arises, innovative distribu
tion channels ertiefgo, and (he product moves into later stage* in the product life cycle.
Consider Apple,
APPLE
To combat ils Ia-.v3y 3.J percent sharp oi the U.S. personal computer market. Apple lias opened more Ilian
75 retail locations since 2001. The stores sell Apple products exclusively and large! tech-savvy customers
will) rn-store product presentations and workshops; a full line of Apple products, software, and acces
saries; ;md <i ~Genius Bar sailed by an Apple specialist. Although the move upsel existing retailers. Apple
explained thal8ihcewww.amHe.com gene rated ton only 25 percenI of sates. its own retail chain was naE*
ural extension.31
Xn marketing channel will remain effective over the whole product life cycle, liarly buy
crs might lie w illin g to pay for high valueadded channels, but later buyers will switch
10 lower-cost channels. Sm all o If ice copiers
were first sold Ijv manufacturers" direct sales
force;;, taler thropgh office equipm ent deal
ers, still Inter through in;iss m erchandisers,
and now by m ail-order firm s and Internet
marketers.
In competitive markets with Low entry burtiers, ihe optim al channel structure will
inevitably change over time. Itte change
lo u Id involve lidding o r dropping individual
chunnei members, adding or dropping partic
ular market channels, or developing a totally
new way to sell goods.
Addiiiy or dropping individual channel
m embers requires an increm ental analysis,
What would the f trial's profits look tike \viLh
and without this intermediary!1An automobile
m anufacturers decision to drop it dealer
ret] u ires sublract ing i lie denl er's sales a tid esi i mating the possible sale* loss or gain to ihe
manufacturer's other dealers.
AWaM:ii;r puck, MveDl 1he ninny mmfe's Ifit ajirpariy ptodij :s s and sells through a nEhnnK nf
Sometimes a producer considers dropping
1111 intermediaries whose sales are below a cer

tain amount. Look at Navistar:
uealpfsh^ps Ihal have Ihi technical 'jirperi ss and local contacts io kssji Navistar m markets both
larpe and small
-;3 i
PART 6
D E L IV E R IN G VALUE
NAVISTAR
I'iavistar's operating company. inlHTnalional HucK and Engine Corporal on, noted at one time that 5 percenl of its
dealers ware filin g fewer lhan ih-ee nr lour trucks a year It cost ihe company more lo service these dealers
[ban 1heir sales were WQlUh bill dropping these dealers could have repercussions an the system 35 p ivhple. The
unit costs ol producing trucks would he higher, because the overhead would be spread over fewsr trucks: some
eaiployees and equ pmffit would tie idled; some business 111 these mantels would go 10 competitors; and ottier
dealers might become insecure. Other (actors incrude nonropnewntation in smaller markets. longtime loyal cus
tomers not being serviced appropriately, and overall fewer dealers with technical knowledge to serve me cur
rent customer base. Alt these factors must be laôn Into account.
T h e most difficult decision involve.^ revising 1lit? overall cbrmne] strategy.-1-1 Distribution
chyndcJs clearly become outmoded, and a gap ,ir ises between the existing distribution aysJoin ant! tbe ideal system that would satisfy target customers' need* and desires (see
'Marketing Memo; Designing a Customer-Driven nistribuiion System"). i:\ampJes abound:
Avon's donr-to-door system forselling; cosmetics had to he modified as more women entered
the workforce; IB M i exclusive reliance on a field sales forre had to be modified with the
introduction rif low-priced personal com puters; and in retail banking the trend toward
Opening branches has now come full circle within just a decade;
BRANCH
BANKING
Just ten years ago bank branches seemed 10 tie ft dying breed, a casualty of banking industry consolida
tion and Ihe beWflU that automated teller machines, online hanking, and telephone call ce n te r wouW
reduce customers' reliance on ihcir neighborhood branches. In Manhattan alone, the number ct branches
and bank offices dropped from fi07 lo J5G between June t994 and June 2001. Vet new bankers say lhat
the industry overestimated ins attraction of electtonic banking and the profitability of retail banking. f.laay
people want 'ftigli-touch" over "hi-gh-tcch," or at least the thome, and banks are responding by opening
branches at a breakneck dip. Ban* of America, for inslancc, plans to open 550 branches over Ihe next
three years. Sank One Corp.. which lopped ofl SO of Its branches between 2000 and 21)02, is expanding
again flanging analysis caution, however, lfial the expansion ol the branch drslnbution channel, if nol well
thought out. could dilute bands' earnings. The banks lhal wiil succeed, they say, are those that are lully
Committed to Hie retail strategy, such as Seattle-based Waslimg:on Mutual, and Cherry Hill. New Jerseys,
Commerce Bancorp Inc. According lo Commerce's CEO, simply building a branch system is not enough
Bansis need a proven, value-added" business model to entice customers and cross- and up-seJi [heir
products.-14
! ! ! C hannel Integration and Systems

Distribution channels dri not stand still. New w holesalingnhd retailing institutions emerge,
anti new channel systems evolve. We will look at ttit' recent growth of vertical, horizontal,
and m ultichannel marketing system s the next section examines how these systems cooper
ate! conflict, and compete.
Vertical M arketin g S y ste m s

One a I the must significant recent channel developments is 1lie rise of vertical marketing
systems. A conventional1m arketing chan n el com prises an independent producer, Wholesalrr(s), and ren tier is), Each is a separate bustness seeking to m nstm & e its own profits.
D E S IG N IN G A N D M A N A G IN G VALUE N E T W O R K S A M D C H A N N E L S
Stsrn and Slurdivanl have cutl.ned an EXCflllen] Iramework, calfetl

Customer-Driven OisHitulion Svste^n Oesjcjn. (or moving a poorly
functioning ci^Kitrmi.on system cJlowf to a
ocnei: s 'dnsl system
Ccrnpanies have 1o reduce Hie gaps belween lhe service nulputs lhal
target customers' desines, t a e lf* existing cnannel sysl^m rlci'Vecs, and Ifoo&s maftiigytieru tlnnks ari (ttis.hle v.ithin tlvs existing
constraints. Sin Steps are IfMitved:
1. Research large) customers' value perc&plFons, needs, and
ccsres regarding channel settee outputs
C H A P T E R 15
2. Examine Die performance of the company's and cwr-poiitors'

existing if'slrJbu ton systems in relation lo customer desires.
3, IV.d serviCE uitpul (japs Stol netJ c o r iw ^ a f lm
<. Identily major consliainis lhat will limil p e s tle corrective
actions.
5. Design a manapernsftt'fjoundef dsiflnel satubon
6. Implement Hid reconfigured tfislribuiion system.
icufiv Ariie f. Cougn:jn, Enn Ar<feiS0fi. Louis VI, Stem. jnd Acte? I. Ei-Ansnrv. MMelWfl Cflflwefc 6ih ed. ip
Jwwr SacWfefliiref. N.f: Ptemiceuau, 200t|
even if this gusil reduces profit lor lhe system :is a whole. Xu channel m em ber lias co m
plete o r substantial control over oilier members,
\ verticid tnarfceling system (VMS), by contrast, com prises the produced wholesaler^);
and rL'lEtil(.T<Sr acMng as a unified system. One channel member, lhe cliw iwt cupltiii). pwifs
ilie others or liiiu tilises liirm or has su m uch power that they nil coape rate. The channel
captain can br tin- producer, the wholesaler, or the retailer. N'mable producer diannel cap
tains are Coca-Cola wiffl sqfl drinks, Gillette w hli shavmy products, and Procter & Gamble
widt detergents.
VMSs arose as a resuli [if si rong channel mein bees attempts la e n u im i channel behauor
ami elfininate the conflict that results when independent Riclfltiers pursue their dlvit objec
tives. VMSs achieve econom ics through size, bargaining' power, and elimination o i du p li
cated services. They have become die dominant mode df distribution in ihe U.S. consumer
marketplace, sei vlng between 70 and tit) percent o f the told market. There [ire three types uf
V,X5 S: corporate, administered, and contractual.
A 0 rp o fa fe W /5 combines successive $ lg c s of production and distrib

ution under single ownership. Jror example, Sears obtains over 50 percent of the goods ii
sells from companies th:n ii partly or wholly omis. Sherw in-Williams makes paint but also
ivlis and operates Z.nUQ retail uuQpts. Giarft l:ood Surres operates an ice-making facility. a
soft-drink hauling operation, an ice cream plant, and a bakery that supplies Ginn I sinres
ivith everything from bagels to birthday cakes.
A n titimwistereti VMS coordinates successive singes of prod n o

liqn and distriUjtttion through the size and power of one of the mem hers. MûufiictLLterS
of :i do m in an t brand are able tu secure strong trbtiic cooperation and support from
rose tiers. Itm s kudak, G lllettr, and Cam pbell Soitji .ire jbble to cfm im and hiph lei'ets (if
caoperafion from iheir ribseltersin connection With dssptays. ihetf Space, prom otions,
anti price policies.
The most advanced supply-distributer arrangem ent lo r adm inistered VM Ss involve
d istrib utio n program m ing, w hich ta n be defined as building a planned, professionally
managed, vertical marketing system that m eets the needs o f bo ih m anufacturer arid d is
tributors. T h e m anufacturer estab lishes a departm ent w ith in the co m p an y called
r/iitnfju(ar-rflif f p J a i i f i i u j , I k job is ui identify distributor Lieutts and buiid tip mercftandising program s to help each d istrib utor operate :i> efficiently as possible- Tills
d ep arim em and the distrib u to rs jo in tly plan n ie iclia n d isin R goals, in vento ry levels,
spate si Lid visual m erchandising plans, sales'training requirements, and advertising ami
43?
PART 6
DELIVERING VALUE
prom otion plans. .The aim is to convert (he distributors from think mu tlun they make
their m oney prim arily on the buying side (through tough negotiation w iih the roanufiaci irrt-r) to s it in g tlun i hey make their money on the selling sUte [by being pari of a sophis
ticated, vertical marketing system )<Kraft and Procter & G am ble are two com panies with
excellent disi rilm tor-relations pin oiling.
'
A minntc tual VM S cons [sis o f ind ep end en t llrin s at dlffu tent le w is of
p ro d u c tio n pnd d is trib u tio n integ ratin g th e ir p rogram s tin a c o n tra ctu a l ha sis to o btain
m ore econom ies o r sales im pact than ih e y co uld achieve alone. Jt>hnscoti Lind Law rence criU
Uijftm "va h ie & d d m g p artn e rsh ip s" IVAP&l.35 C o n tra c tu a l VMEte now co n stitu te one t>f the
m nsi significant developm ent1' in ihe ctottom v. T h e y are of three typcis?
1. V.,Jioteniler*si}otifQte d p o titn tm y ch a in s - VVlioiesaJeis o rg an ize v o lu n ta ry chains of
independent retailers lo help them com pete w ith Iurge chain orgj0H i;ia[iO h s.T h e w h o le
sale r develops program In yyhfcJi independent retailers standardise i heir selling prac
tices an d a c h jtv e buying econo m ies that enab le the group to cn in pete effectively with
chain o rganizations.
2 . Ite h itle r co O p e m tiiie s- lieto ilers take the in itiative and organize a new business entity to
c a rry on w h o lesalin g an d p o ssib ly sortie p ro d u ctio n . M em bers co ncentrate theft; pur?
chaS^S through the re taile r co-op anti plan th e ir ad ve rtisin g jointly. Irofits are passed
b ack to m em bers In prop ortion to th e ii purch ases. X o m n e m b e r retailers can also buy
through th e co-op but do not share iji the profits.
3 . rtw rich tae o rg m itzflffcrLs- ch a n n e l me tn her culled a /fm je Jtiso n u ig h i lin k several su c
cessive stages in the prod uci Ion-distribution p ro ce ss.'Fran ch isin g has been the fastestgrow ing re ta ilin g d evelo p m en t in r w e d l years. A lth ou gh ih e b a s k idea is art o ld one.
som e form s o rfra n d iis in g are quite n e w
The traditional system is the manUjininTcr-sjivnsoftd rx'tciilvr I'ntnchiM. lu rd . for example,
licenses dealers to sell its cars. 1he dealers are independent businesspeople who agree to
meet s pet tiled conditions of sales anti set vices, A not lit i is the ttmiiufiictiirer-spotUored
wholesalerfrtinchkw Coca-Cola, for example. licenses bottle^ (wholesalers) in various m ar
kets who buy its syrup concentrate mid then carbonate, hmtie, and sell u to retoilers in lucctl
markets, A newer system is the seri/(ce-finti'Sponsotvd rentHer fra uchise. A service firm otgan izcsn whole system for bringing its service efficiency to consumers. F.sntriples are found in
the auto-rental business (] lerl? Avis), fast-food-service hlisitu'S'; (McDonalds, liurter Kingl.
and motel business [lE ^ n rd lohnson, Kainada Innl

'
Many independent re sailers that have not
joined VMSs luix c developed specialty stores ih.it serve special market segments. Ihe result
is a polarization in retailing between large venical market inf; organizations and indepen
dent specially siores, which creates a problem for manufacturers, T h e y are s i n g l y tied to
independent intermediaries; but must eventually realign themselves with the Hifih-grrrtvth
vertical marketing system s on less attractive terms. Furthermore, vertical marketing sys
tems constantly threaten to bypass large manufacture*? and set up their own mattuEaftttririH th e ticto co in in -rith n in r e ta ils t# in no Inuger betn/eclt i/ ifk p iiidtui bu sin ess tw its bm
between ttthole systems o f centrally fftogram m ^ d itettwprks (corporate, n dtttin itiereel, a n d
caittracutnH coDipetilig agtBHjt ojje 'tUtfothef n>ficltieiv the best r'fj-^r economies nml citstu)it&
response.
H o rizo n tal M arketing S y ste m s

Another channel development is ihe horizontal m arketing system , in which two or more
unrelated companies pul together resources nr programs to exploit an emerging maiketing
opportunity. Many supermarket chains have arrangements with local banks to offer in-store
banking. Citizen Hank has 25G m-store branches In supermarkets in Nc*v England. IZach com
pany kicks the capital, know-how, production, or marketing resources to venture alone, or it is
afraid of tne risk. T h e companies might work with cad i other uit a temporary or permanent
DESIGNING AND M ANAGING VALUE NETW ORKS AND CHAN NELS
CH A PTER IS
A Patter-Hanriilin 3d tha; slresses
I AM AN ENGINEER,
I haljLWt" il"': bf I (c i In fn
tirnkct
i l , 11111]In r1 1 .in ,._o11-J r ,'. ts
dotlfir: m ,i Tn'hV fmC, I tnln:Yi'

explosions in injirr maiiu only
nTtku ii suurri m Hip rnmipr.
i h ' - ' l i t v t l il 'I j J i c w n i r y n. ,-i ..j i i s l . '
ol :i i 1111111nindueEnr
I ttpII evt* Vtj riij pul
it bod wtion tic i^nd,
Do,o r (lo nîIhi-ru is nn"iTy!"
ENGINEERS
VLL THE WSMl>

JllfFERrWrLY
basis or cncnic a joint ufcmnre cofijpany. l i&H lilock, in c . for uxmnpk, entered into an agree
ment with GEJOO in sn riiE ic c to provide uar insurance inform ation to Qiotk customers.
Customers now can contact GRK'O through a special toLt-Frcc num ber
M ultichannel M arketing S y ste m s

Once, many com panies sold to a single market ttiiough a single channel. Today, with the
proliferation of in stonier segm ents and channel possibilities, inure com panies have
adapted multichannel market in;;. M ultichannel m arketing occurs wl left m single: firm uses
ivtti or more marketing channels to reach one ur more customer segments.
PARKER-HAMNIFlN
The Parker-Hannilin Corporation (PKCf &el!s fluid power and electromechanical motion and control systems lo
satiety of mobile and stationary equipment markets through distributors and direct OEM sales, Titers appears to
be liittlg conflict between channels selling 1o separate target market segment such as forestry, marine, indua
trial, agrrcullural, mining.and many others.

By adding more channels, com panies cliii gain three important benefits. T h e first
increased market coverage, The second is lower channel cos* selling by phOng rather lhan
Its engfiiflsiint)
applications
in n...i iy
43?
490
P A R T *.
D ELIVERIN G VALUE
persona] visits 10 small customer?. The third is more custom ized sellingadding a technical
sales force to sell more c o m p ly equipments The gains 1'nim adding new channels toipe ai a
price. however. New channels typt-CaLly Introduce conflict anil control problems- T'wd or
more channels may end tip com pel mg for the s^me customers. The new thiiiTntrla m ay Ikmure independent and make Coope&tiun iflipre difficult
Clearly. com panies need to think (it rough tbeir
channel architecture. Moriariy and Moran propose using(lie hybrid grid shown in Figure 15,6
to pi:in lhe channel architecture-1^ The grid show s several marketing; channels (rows] anti
several d e m an d generation disks (co lu m n sl, T h e
illustrates w hy using only One
ch an n el is not efficient. C o n sid er using o n ly a direct sales forte. A salesperson would
have to find leads, qualify them , presell, clo se the sale, provide service, and manage
account growth. It would he inn re efficient for the com pany to perform [lie earlier tasks,
leaving tile salesperson to invest his or her costly time prim arily to close the sale. The
coin jinny's m arketing d e p an m cn t would generate leads through telem arketing, direct
in ail, advertising, and trade shows. The leads would he sorted into hot, warm, and rool by
using qualifying techniques such as chocking whether a load wants ;l sales call and has
adequate pu rch asin g power. T h e departm ent would also run a preselling cam paign
inform ing prospeers about the com panys products through advertising, direct mail) and
LL-Ieniarketing. T h e salesperson t times to (he prospect *vhen the prospect is ready to talk
business. TMis m ultichannel architecture optim izes coverage, custom ization, a n d control
w hile m inim izing cost and conflict.
Com panies should use different channels for selling to different size customers. A com
pany tan trne its direct sales force 10 sell to large customers, telemarketing to sell to midsize
customers, and distributors to sell lo small e list outers; hut these gains ta n he compromised
by an increased level of conflict over who h,is account ownership, i or example, territuivliased sales representatives may want credit For nil sales in their territories, regardless of llie
marketing chan net used.
Multichannel marketers also need in decide bow much of their produce to offer in each of
the channels. Ther e me many different approaches to take*consider the foifcwing two:11
JK/It M u s ic a n ti C o m p u te r IIfy rltl, the $29 2 in ill ion marketer t)f cons li iih t electronics,
offers its entire product line in its catalog, on its Web. site. ;md in its store lo give customers
the sam e View of its rooiIs regardless of Which channel they choose tn shop. J&R sees ofl'cr-
Demand-generati-onTasks
F t G . 1 5 .6
Lead
Qualifying
(generation
sases
The honls Gna
Presales 'Clcseofsate
Postsales
Hitognl
service manag&nent
Inrcnmes
S-vm i1 iltf.vL-pri l p,tnifliy n ^| l|, r.uln
Wyan, Mvkwiiyf Htft ri t,(art?liu
SfSiL'n.1;.' fUivxtl P. t.t-.hl^ss
[l-iotBoititr-D&e.Tthi-r 1990 1550
National account
management
Direct sales
lelemjirStGlmg
o
Q*
c
O
c
z
UJ
Direct mail
Reiair sioi ts
DiSlJilJlllOrS
Oep.lprs And Yalueactd(Mt resellers
AHvtftisinp
B
E
LU
S
Q
h
tfl
3
DESIGNING a n d MANAGING VALUE- NET'.VQkKS AND CHANNELS
iuy ftverythiftg in all ibret: c h a p e ls as a competitive advantage and Feels that m akingiitue
customers are healed equally wul] is what makes ibe store unique. Tfci not evejy retail# has
ihe [usury of huge stand-alu tie sum.1:; such as J&li's Wfl.ODO-squarc-foot Manhattan empo
rium. In addition, bulky calalogs cost more tn print and mail-
Pfiiaganiti Inc,, views i lit- Web as the ideal clitmnei for slio v iiiij uTI" iT'. entire line ofguods
and is limited by space in iis hi stores land 3 outlet stores) loolTcrinfl !t selection u l iis entire
nutdoorwear line. Similarly. Patagonia filters Il*s.s than 7(1 percent of mercharnJiSe in iis print
tatalogs. Other marketers preFer lo limit I heir Online offerings on the I henry [hot Customers
look in Web sites and catalogs for a "best o f array of mvrdh iodise and don't want to have t<i
click through dosteiisof pag ct
I I I Conflict, Cooperation, and Competition

No matter how well channels are designed and managed, there ^vill be som e conflict, if
Jnr na o ilie r reason than that ihe in terests of independent bu sin ess i nUti.es do nut
always coincide, Channel conflict is generated when nm* channct mem ber's action* pre
vent ihe channel From achieving its goaf. C h a n n e l co o rd in atio n n t n iis when c h a rn e l
inLltiI)l'I s are b r i g h t together lo advance the goals of (lie channel, as Opposed m iheir
own potentially incom patible jiOiils.115 Here we exam ine three questions: What types o l
conflict arise in ch itn n d s? Whql causes channel m n llir ii What can be done tn resolve
conflict sititaiinns?
Types of C o n flict and C o m p e titio n

Suppose a manufacturer sets up a vertical channel consisting of wholesalers and retailers,
I hr i'ii;imsliicilis(_r hopes For channel cooperation thai will pm duer greater profits for c a d i
channel member. Yet vertical, horiiqaunl, L in d multichannel conflict can occur.
H?rrifei/dian i tel co ti/ftcr u tcaiJS co nil ict bet vvcen difle rcn t levels wi thin the Same dtanne I.
General Motor'S eonie Enin conflict with iis dealers in trying to enforce policies on sCtvice,
pricing and advert! sko^, Coca-Gala came into conflict with hot tiers who a Ino agreed to bot
tle Hr, Pepper.
H o rizo n tal ch a n n e l co n flict involves rj-nnllict between inimbers ai the same level within
the channel. Some J-'urd car dealers in Chicago complained about otlier Chicago fiord deal
ers advertising and pricing too aggressive!)' Some Ii^ a Inn franchisees complained about
oilier Plstza Inn franchisees cheating on ingredients, providing poor service; and hurting ihe
overall Pizz$ Inn image,
Multichannel conflict exists w hen die m an ufacturer has established two nr m ore c h a n
nels that sell to the sam e uiarkei. M u ltic h a n n e l c o n flic t is lik e ly to he e sp e cially inten se
w hen ilie m em bers o f one chann el get it lower price (based on larger volum e purchases) or
w ork with a lower m arg in . W hen G o o d year b e g in selling its p o p ular tire b ran d s through
Sears, Wal-Mart, and D iscount Tire, ii angered iis independent dealers. It e ve n iu a lly placaied
them by offering exclusive tire m odels that w ould not he sold in oiiier retail o tiilcts. Such a
strategy does not alw ays work. W hen Pacific C ycles purchased S c lm iiio ; it decided to sup
plem ent the brand's higher-end 2 ,700-dealer netw ork w ith some o f its own ch a n n e ls where
it sold its own m id -tier hike.'; through laige retail ch a in s su ch as'[b y s''R ' U s, Target, find WalMart. Eii/en though Pacific Cycles offered exclusive models tn the existingSchwl$frt network,
over 1,700 dealers pedaled away. t\ key question was whether the sides ^ lins from the big
retail chains would offset the loss From the dealer defectitms.w
C a u se s of C hannel C onflict
II is important lo identify I be causes of channel conflict. Some are easy to resolve, others
are not.
Ojil- major cause is gaal lucainpQtt&ffity lrnr example, the m anufacturer may warn to
achieve rapid market penetration through a low-price policy Dealers, in contrast, to tty pre
fer lo work with hij^h margins and pursue sh cn-cjih pro lit ability. Sometimes conflict arises
from tmdeof roles and rights. I ll1may sell personal eonipmers io large accounts through iis
own sales force, hut
licensed dealers may also be trying to sell lo large accounts. Territory
boundaries and Credit For stiles often produce conflict.
CHAPTER IS
4<71
493
P A R T IS
D E L IV E R IN G VALUE
Con Ilf cl cun also stem from differences in perception. 1lie m anufacturer m ay Ik* optim istic
about ihe short-term econom ic outlook and want dealers 10 carry higher inventory. Dealers
n t jy be p e ssim istic , hi iltc beverage category, ii is not u nco m m o n lot disp utes to arise
between m anufacturers and ihc-ir distrib utors about the optim al advertising strategy, Conflict
might also arise because o f ihts interm ediaries' ilepwtterieeon tin.' m alltifiictu jer. H ie fortunes
o f exclusive dealers, such as au lo dealers, are profoundly affected by the m anufacturer's prod
uct and pricing decisions. I his sii nation creates a hi^h potential for c o n ih ri.
M sn iig in g C h a n n e l C o n flict
As com panies add Channels kj gfljjw sales, llicy run the risk r creating channel conflict
Som e channel conflict can be constructive and lead to belter adaptation 10 a changing
environment, but too m uch is dysfunctional. 1lie challenge is not lo eliminate conflict but
to manage it better. Heres an example of how one U2IJ cum puny added a potentially con
flicting c* commerce channel and still managed lo build trusi not stir up conflictwith its
distributors:40
AB
DICK
Printing equ pineal manufaclurer AB Dick was on the verge uf bypassing an important distributor channel fora
direct e-commerce channel. Instead, ltie company developed a tiered dealer model and (armed slrategic Supply
chain partnerships with influential distributors AB Dicfc would deal duectly via the Web with rJ customers in a
respective dealer's terrdtny lor sales Of supplies. The dealer woliId- act as the dlsllibulkul point. b:lt and tol eel
trcm (tie customer, maintain the reialionsh p in terms of high-end equipment sales, earn incremental margins
frcm the online sales of supplies (even ihouqh the ifansaclnjn wo-jld be direct from AB Dick u tiie End user), and
remain Itie lot-al coiiiajtt for Equipment sales. According to Afl Dick's Vice President of Technology, the dealers
were happy because they picked up margin on business they ncirer had, Itul irey also picked up coKeclons.
freight, transportation. and labor. AB Dick benefited Irom reduced cosls per online transaction and mcremen1.il
sales. II had to balance the etficiencies and convenience of direct online ordering [or its end users with the need
to maintain its dealers as local ptonts-df-tlislnbuljori and customer contact
t here are several m echanism s for effective conflict m anagem ent-*1 One is ihe adop
lion of superurdinate goals. Channel m em bers com e to an agreement on the fundamen
tal goal they arc jointly seeking, whether it is survival, market share, high quality, or cus
tom er satisfaction. [h c y usually do this when the channel faces an outside threat, such as
a mote efficient co m p ilin g channel, an adverse piece of legislation, fir a shift in consumer
desires.
A useful step is lo exchange persons between two or more channel levels. General Mnrnrs
executives might sgree to work for a short time in some dealerships, anti some dealership
owners might work in G M s dealer policy department-1foptrfully, ihe participants will gro^v
tn appreciate the olhers point of view.
is an effort by Qtte organisation lo m u die support of the leaders of another
organisation by induditiig Ihcm in advisory councils, boards of director*, and the lit*. As
iong as ilic initiating organization treats die leaders seriously and listens lo ihe it opinions,
co-optation can reduce conflict, hut die ini hating organisation may have to compromise its
policies and plans to win thefr support.
Much can be accomplished by encouraging joint m em bership in and between trade asso
ciations. l or example, there i^ good cooperation between the (irn cery M anufacturers of
Am crica and the rood Marketing Institute; Which represents most of the food chains; this
cooperation led to {^ d e v elo p m e n t of die universal product code (UPC). Presumably, the
associations can consider issues between food m anufacliirersand retailers and ICSoEve [hem
in an orderly wajp
When conflict is chronic or acute, the pitriifs may have to resort to diplomacy. medial ion.
ui' arhiiraiion. Diplomacy takes place when each side Sends a person or group to meet with
iis counterpart lo resolve the conflict, Mediation m eans resorting tn a neutral third party
who is skilled in conciliating ihe two panics' interests. Arbitration uGCurs when ihe two par
ties Ogree to present (heir arguments lo one or more arbitrators and accept ihe arbitration
decision. Sometimes, when none of these ni el hods proves effective, a company or channel
pai tmT may choose to file a lawsuit- Levi Strauss and U.K. retailer Tesco became locked in a
legal battle beginning in la^y.
DESIGN ING AND MANAGING VALUE NfiTV/ORKS AP*p CHANNELS
LE V t S
Le'.'i-Slrauss INcd a suit wilh Uie European Court of Justice againsi reset) claiming lhe retailer's selling nf towprfbfff Levt's jeans imported from oulside Bnta n "unflenmnes Itie producl experience.' Tesco had offered gen
uine Levis at rnr;ghly hall lhe price of alh-er U.K. netai'ers. Lei^Straus also objected lo the feci that its leans
appear in the same stores that sell produce and other toed ilems. AHer much legal wranging, ine courts decided
inlavor of Lew-Sliaiiss In Mtwember 2001. Levl-Strauss subsequently decided <o introduce a much less expsnSave value line; n! Signature icans (hat tould be sod in Asda supermarket in the U-ik-J Kingdom, as '.veil as in
t
Will- Mart
flis United Stales.'*1
Legal and Eth ical Issues in C h an n el R elations

pior Iht? m ost p art, com p a n ic s .art! leg ally free to dove tup w hatever c h a n n e l arrangem ents,
suit th em . In fact, lh e la w seeks to p reve n t c o m p a n ie s from u sin g e x c lu s io n a ry ta c tics
that m ight keep co m p etito rs from u sin g a c h a n n e l, K e rc we b rie fly co n sid e r th e le g ality
nf certain praetiecs, In c lu d in g ^ e lu s iv e dealing , e xc lu siv e te rrito rie s, tyin g agreem ents,
and dealers' rights.
Many producers like to develop exclusive channels for theii products, A strategy in which
!lit'seller allows only certain outlets to carry i<s products is railed exclusive distribution;;
When the seller requires that these dealers nut handle cumpeiiiors' products, this is called
cjiicluslvt; dealing. Both parlies benefit from exclusive arrangem ents The seller obtains more
loyal and dependable outlets, and the dealers obtain a clearly source of supply o f special
products and s f in g e r seller support. Exclu&ivg arrangements areleâl as long as they do run
substantially lessen t'ompeiitiim or tend to create a monopoly, and ;is long as both p an ics
tiller into the agie c lie n t voluntarily.
Exclusive dealing Often includes esc Ius ive for ritri rial agreements. fhe producer nuy^gree
ijoi tci sell it> oilier dealers in a given area, or the buyer may ogree to sell only in its own ter
ritory The first practice increases dealer n id u isia sin and commitment. It Is also perfectly
legala seller has lid legal obligation lo sell through more ran lets tliati ii wishes. The second
practice, whereby the producer iries lo keep a dealer from selling runsitie its territory, lias
became a majnr Eegal issne. An example of bitter lawsuits is one t>roui^Bti by G T bicycles of
Santa Ana. California. against the giam Price-Cosico ehain. which sold Z.fiOOofiis highpriced i non main hikes at a huge discount, thus upset Ung Cits other U.S, dealers. G T alleges
that it fust sold lhe bikes lo a dealer in Hussia and that they were m eant Tor sale pkily in
Russia. G T maintains dial ii constitutes fraud when gfiscbuhicrs work with middlemen to get
exclusive goods.'11
Producers of a sirong brand some tim es sell it lo dealers only if they vviU take sotne nr all o f
tlic rest o f (be line. T h is practice is called full-line forcing. Such ty in g ag reem ents are not n e c
essarily illegal, but th ey do vlo iaje U ,5. la w i f they tend W lessen com petition substantially.
rrotJ Lieers are free Lo sc led i heir dealers, but their rigfil lo tcrniinaULdealers Is somewhaL
restricted. In general, sellers can drop dealers'for cause," hut they tannot drop dealer^ if. for
example, the dealers refuse to cooperate ill a doubtful legal arrangement, such as exclusive
dealing or tying agreem ents.
" I E-Commerce Marketing Practices

E>buiness describes the use of electronic means and platforms to co n d u it a company's
business.M E-com m erce m eans that the company nr s-iic offers io transact or facilitate lhe
selling (if product; am! services online. iv-commerce has given rise ill turn lo
purchasing
and e-markeliug. E-purrfiajjfag means Companies decide I d purchase goods, sorvlccs, and
informal ion from various online suppliers. Smart e-purchasing lias already saved com pa
nies millions of dollars. E-m arkeiJng describes compum efforts lo in fo n p buyers, com mu
niLnte, promote, and sell ils products and services over tire Internet, l he elerm i.s also used
in terms sucti as e-flnancc, e~learning. and e-service. but as someone observed, the ew fll
even!unity lie dropped When most business praeiiec is online.
We can distinguish between pure-click companies, those that have launched a Web site
wit haul any previous existence as; ft firm, and hrick-am l-elick companies, existing com pa
nics that have added an online silt1for information and'or e-commerce.
C H A P T E R IS
M3
p a h t
DELIVERING VALUE
P u re -C lic k C o m p a n ie s
There me several kinds ol pum-click CftmpinteB: Search engines, Internet S c rvice Providers
(ISPs). comm erce sites, inm site Lion siies. content sites. and cttabLer sites. Commerce sites
sell nil (v lies of products and services, notably hooks, music, toys, insurance, si ticks. clodies,
financial services, and so on. Among (lie most prominent co m :lit ree sites arc Amazon, eliayt
and Elxpedia. Com m erce .sites pse various strategies to cu nip etc: AutoNation. a leading
metamedEary c>r tii r buying and related services; Hotels, ilie information leader in hotel
reservations: lluy.com, the low-price lender: W inespectator, the single category specialist;
and Heflccl.com, the mosl personnli/.ed site for skin and hair Care,
Thu Internet is most useful for products and services when (be shopper seeks gremcr
ordering convenience le.j^., Iio o b and m usk) or lowei cost te.}*., slock trading or news read
ing), 11 is also useful when buyers need in Ton nation about product fern u res and prices (e.g.,
automobiles or computers!. I he Internet is less useful for products that must be touched or
exam ined in advance. EJUt even ih is has exceptions. People can order furniture from
EthaiuUlien.com. major appliances from Sears,cum, and expensive com puiers from Dell or
Gateway wi thorn trying them in advance,

Li Pitge-click Web b u sh ia ^ e s read ied astro n o m ical cap italiza
tion levels in tlie late 1990s, iti som e cases far exceeding the cap italisatio n of major
com panies sttcli nis United Airlines or PepsiCo. They were considered a major threat io
traditional businesses until tlie investing frenzy collapsed in 21)0(1. 'Marketing Insight.
ISnrsi of ihe D ot-Com Bubble" describes tlie decline in dot-com fortunes. As m uch as
the Internet hooin w as ovt-riiyped. its demise m ay have also been. greatly exaggerated,
Table llj.LI displays some com m on m ispcrceptions as lo the current state d f f-business
and e-com m erce.
Com panics nmsi set up and operate their e -commerce Web sites eareltilly Customer ser
vice is critical. firm s such as Rift Camera use live online chai to give potential customers
Imm ediate advice aboiit products for sale ori their Web site s.1'" Asset manager Vanguard's
service representatives train customers to use its Web sites over the telephone. As a result,
Vanguard was able to cut staff in half, an important accomplishm ent given that a phone ca!!
to a rep cost the com pany S3 versus pennies for a Web login,11'
BUSJ 'JESS ,
U SIN ESS -COM m e r c e Alihough the popular press has given the most
attention to ratsiness-to-const)mer {B 2Q Web siies, even more activity i^ being conducted
on bu si ness-tn -business (R2ti) sites. 'I lie B2B sites a rt changing the supplier customer rela-
TABLE 15,3
E-Business Pcrceijbrm versus Reality
Perce)] (ion
Reality
PrMtable ln1rat companies are ran*?
Afmut J0% of 200-pltfs. public Net companies mart a fourih-qua'ter p.rofit iri 2002.
Companies dilched Web efforts amid ihe lech recession.
Spending one-business projects has riser every yeai since |i>e UusC rum compris
ing 2/% o all tech sper-ding
Broadband has not gamed tradior.
U.S. subscripl ions fBve doubled since 2QD1 and are growing a) 561i
hie produciivity gain fffttfifi-tLis riess turned out tu tie mates!
Pipdutlfitly gra.vth do.jblcd as tfie N't! prolileraled, Lul rnosl nl Ihe ;:OTplcra:n:n was
m industriei Hiat use lech a lot. sue)) as aulas
Online afoertismg died.
The popularity o! Danner ads pve way to ads tied lo seadi resu-ls. boosting onhre
isfflg lo El>.6 N fc i this year.
PO investors in e-tailofslost lols ol money.
An imestmenl of S ^.000 m every e-tail iPO. gooO or bad. ivou J huve mcfuased
G?I3 e commerce revii! really happened
Although hundreds ol B2B e*changes lailut!, $3 ii trill on wortii n* C'comn xe was

conducted in 003.
Web-era productivity- gains <ire confined to ;ech companies.
More man B0 : of post-1^ 5 acceleration is ;ii nontedi i^.ctustnîs.
about 35%.
SMi'.ne'Aflaplefl Irrm Tillfllhy J. Mirtflney, 'Hi* E-BLf Sppfi&i,' ftisi'ri^ltart. May 12. 2fXS3, pp CU-60
DR S I G N I N G A N D M A N A G I N G V A L U E N E T W O R K S A M D C H A N N E L S
Alwough ihe internet usiiereit m a new era, many businesses [hi

rat capitalize tin the initial oppor)iaffls anrf made a hast of errors
Dot-ooms faifed few a variety of reasmfisi Many mshed into vse mar
ket without proper research or planning, they Pad poofly designed
Wet) sites wilti pnodletns ol comp.&tiiy, poor nainâtiort, and down
lima. They lacked adequate inâsirncUifes far shipping on i mu arid
for answering customer irvqniries. They beliaved that Ihe first com*
r>sny entering a category would ivbi category leadership, lliesc
companies wanted lo eple.l nelwwk economies, njimnly. the lad
inat the value of a network to eatfi of ils menders is proportional lo
Ihe number ol olher users (Meicalfe's Law). Some |ust rushed inio
(IK market in Ihe hope ol launching an .ml.-al public offering |lPO)
Mile ihd; market was hofl
C H A P T E R 15
Many dol -corns cTd rwt twild a sound easiness model (hat wduU
deliver eventual pnofi's, The ease of entry of competitors end the
e&e ol customers swifthitig Web sites in seatch a! heiiicr prjfctt
forced them !o accept margin-killing low prices To acquire cus
tomers, dot-coms spent largo amoimis on mass marketing and
oftl ne advertising. ihcy retail c i spm and l-ij/; instead nf latgel
marketing and WHd-ol-moulfi marketing, and Wey devoted loo mud)
Effort to acquiring customers instead of twitting loyal aral more freili lent users among current customers. They d;d nt1 undOTtertd cus
tomer behavior whm it came lo online surling and purchasing
Bottom line; Buildmg an elfective ahBtte business retires much
(j| ir e saint: hard wcr k, careful p'anrmg jnrf patience ,15 a irafl il; .l'
business.
Stu,.' Adapted Irom UmoinyJ ^jnarv_-,'. Tne f'Ba Suipcse," fiBtaflsslitm* May 12,2C03, :-.i fiO-M
ftionshlp in profound ways, firm s are uablfi f!2H auction sites, spot
pnUnc prod
uct catalogs, barter sites, and other online r?soucce$ to ohm in better prices. In 2002,
LendfngTrce brokered 1.5 m iIIIan loans ott behalf of tU lenders. Retail loans arc fin Ideal
com m odity tn trade online: Lo an s are highly standardized, ihe tending industry is frag
mented, ami large volumes uf irans act ions allow small prufh margins do add u p .l|
The purpose of E12H sites is to make- markets m ore efficient. In the past, buyers bad to
exert a lui of
to gather informal ion on jlvofldivide suppliers. With the Internet, buyers
Stave easy access to a ^reat deal of information. Thev can [>et information from: (!) supplier
Web sites; (2) iiifoDiecliuries, lliird parties I hat add value bj aggffigajihg information about
alternatives: 13J m arket m akers, thi rtf parties tbai create markets linking buyers and sellers
Lind 41 cu sto m e r c o m ifittn ille f w hich are Web sites where buyers can swap stories about
suppliers' products and services.;ii
The net impact of these m echanism s is 10 make prices mart; transparent. In the ease of
undifferentiated products, price pressure will Increaso, In the ease of highly differentiated
product!, buyers will gain a better picftjre of their true value. Suppliers of superior produeis
wilt be able toufisei price transparency with value transparency: suppliers of undifferenti
ated products wilt have to drive down their costs in order to compete.
Brick-and-Click C o m p a n ies
Many brick-and-mortar companies have agonized over whether to add an online e-commorce
channel- Many com panies moved quickly 10 open Web sites describing their businesses
but resisted adding e-coi nmerce to their sites. [lie}1felt I ha I Stilling their products or ser
vices online would produce channel conflict they would be competing with their offline
retaiters, agents, or their own stores.^Compaq feared, for example, that ils retailers would
drop its tine of computers if Com paq offered to sell the same computers directly online,
Merrill Lynch hesitated to Introduce o n line stock fa d in g to com pete with ET R A D E ,
Schwab, and Other online brokerages, fearing that its own brokers would rebel, live!) the
sEore-based bookseller G am es & Noble delayed opening an o n line site to challenge
A m fliO tl, Afl evenludlty succum bed after seeing how much business was rushing to ils
online competitors.
Yet adding an e-commerce channel creatcs the threat of a backlash from retailers, bto
kerf, agents, ond other intemu-diaries. The question is haw 10 sell both through interm edi
aries and online. 1here are at least three str:iLej;ie!* for trying to âin acocptan^ from inter
mediaries. f)ne, offer different brands or products on the Internet. Two, offer rlic offline
partners higher com m issions to cushion the negative impact on sales. Three, takerirtlers on
the Web site but have retailers deliver ami eolleci paym ent 1! lit ley-Davidson treated care
fully h^fore goingonline.
495
496
PART 6
D ELIVERIN G VALUE
HARLEY- DAVIDSON
Gi'.'fir that HarflCf $611$ more Hun S500 imlliun wontl Of pa^'S artd SfltfcSSOtieS la ils loyal foUdv/efS. an online
venture was gr gtjvjpys next step To generals even more njuariUfr. Harley needed tn be careful, however, to avoi-rf
me wrath of 650 dealers wlw b e n e fit from the high margins an Uiose ssies. Harley's soiulton was to send cus
tomers seeking In huy accessories online ! the comp.ihy's Web sile. Before they can buy anything, Ihey are
promoted lo select a participating Harley-Davidson neater. Wien the customer places the order it is lransmilted
lo
the selected flealer for ruHlhient, ensuring !hat the dealer still remams me local point ol lie customer expe
rience. Dealers, in turn, had lo agree 10 a number of standards, sucti as checking for orders twice a day and
n
shipp no orders prompily The Web sile now gets more than i miiLon visitors a month50
Some pure fir predom inantly online com panies have invested in brie t-and-m ortar sites.
th-H iiiirodiiL-i-ci k i^ k s in i" hi;-nam e chains such as Sears to belter lar^ct consum ers and
allow product trial. Dell was rebuffed hv som e relnilers, such as Hest Tiny and CompUSA,
who viewed the company a* a com petitor.11
M ost co m p anies brand ilic ir o n lin e ventures Under ih & c su stfftg brand nam es, It is d iflll' li I i tn lau n ch a new brand successfully, as Ban k One discovered.
WIWC5PAWBAIMK.COM
n June 1595. Bink One launched a sp n-off venlure called WmgspanBank to get m!o the online banking f a t
ness, but i! developed Wmgspangank as a separate enli^y. WingspanBank customers could not use Bank Oae
branches lo do meir Dankmg in person. tJo wonder il garnered onry 144,000 accounts and had to t>e closed
11
down as a separate venture.

Ultimately, com panies may need tn decide whether to drop some or all ol iheir retailers
and o direct. Sants, However; have found that despite die convenience nf online services,
some custom ers still prefer m conduct certain transaction': at the bank Itself HO percent of
new checking and savings accounts art still opened in physical b;ink branches.1'-1
ONLINE
GROCERS
Despite the demise of online grocer Webvan afler burning through S i tnllidn some traditional brick-and
morlar supermarket chains such ns PuhSiit. Saleway, and Albertson's are finding succcss With Iheir online
veniures. Royal Ahold bought a compiling iaieresl in one-time online star PEapod as a service complement
for ils Giant and Stop &
Shop chains. These tfiplns lind online sales a good way lo satisly Iheir more aliment
customers and coapete vntti discounters such as VJal-'Aah. Aithojgh :îe chains incur delivery cesls. mar*
ketmg expenses are minimal. Because of its convenience to customers, the average online order al Safeway
is $120. twice mat of the average m-slore t ckel. Annual online grocery sates (or Bniains oipgest grocery
efinin, Tesco. slow! al aver 500 million pounds (S947. l in i on: making j! the world's largcsl online grocer
Tesco covers SC percent ol lhe United Kingdom and delivers over 1 15,000 orders per vreek.53
Not everyone, however, hits embraced the Internet as ;i channel. Consider Sti.liI,
5 T IH L
Stih i manufactures handheld outdoor power equipment. All Stilil products are branded under one name and St hi
daesnoldoprivale labels fc; Oilier companies. Slihl is best known far chain saws, bill fias expanded into string
Uiminers, blowers, htdge Irimmers. ar-d cut-off machines. It sells exclusively to seven independent U S. distrib
uters and live Stihl-owned marketing and distribution centers, who sell Stihl products :o a nationwide network
of more Ilian 8,CD0 serv.nir.g relail dealers. II also is a WOrldv; rlf: exporter a! U.S.-manufactured Stihl products
to 130 countries. Slihl is one ol the lev,' outdoor-pom-euuipment companies lhat does not sen its products
j
ibrough mass merchanls, catalogs, or the internet.54
D ESIG N IN G A.PJL> MAM AGING VAtUE HETW O RKS AND CMAMNEI.S
C H A P T E R 15
srini emit ;i'l fo u i^ s ort irve v,ils of its
rctlionwde neiviortcot ret^l deatos, who

sell snd service in; pipduEts eitftjsûly. W
Vl want a SMU piflLL;':l you hd'-S U>cjli
Ifl a S^'ii ddflisr
"If you re a lty w a n t to c o m p e le w ith the m e g a sto rc s,

c a r ry a branfl they c a n t c o m p e te w ith.
W v i fcw - n
3 v n , nr * " i S
lip *. CdMT I W f t ^ u f n u ^
IfJI >nli !* f t J c s r w 'tn
im # *K I i - ^ s r - r - J L jr > * - < + 4
' ir d ! ^s riL i'n i IIL l H *i "1 L|
*"
I'W I I I - **
'f i i w i } j j - ^ r , h - ^ m I
-I
i f j n ! n
1 J at 1, vm iN t
rh-m r-Mjt m tuA JW S t r ^ f *

i n - i -i i .*w Jk Pi V i ri-ai r- i
IrtJ-H
I T ^ --Tl * P l t t l l I,
"h-# . r r * p*j
w 7 w i a iF'-rh
l U M K V k r
1 * * r jT l tr^s, - n # n l w # >
M u n tm 1 W M khwda
JST1HL
:::
1, Most producers do not sell their goods directly to Final

users. Eli; tw een [i me hirers mid llnal users stands otic Or
mure
(ih ln n clii, n host o f t n iit tiliflg inLerincd*-
:irics perfo-r tning a vririeiy of funetions.

2. Marlceting-chftnnci tUicjsitujs nrc artrrmg iEn' most c riti
cal d ecisio ns facing m anagem ent, T h e com pany s chosep channel Is) profoundly nifeci; all other marketing
decisions.
3, C o m p an ies use in ie n iiC Llia ric M .vlitn they lack the fin a n
c ia l te se u rccs to c a rry out direct m arketin g . w hen direct
m arketing is nm feasible, anti w hen they can earn m ore by
d tiin y sn, T h e most in ip d rla n t fu n ctio n hi p e rfo rm ed by
ilite m ie d ia rie s ore inldrfttdtiO ri, p ro m o tio n , n e g b liiilia il,
ordering, financin g. risk taking, physical possession, pay*
in f in , and title.
4. M anufacturers have m an y alternatives for reaching a m a r
ket. T h e y can sell direct or use one-, two-, or ih re e -ie v fl
ch a n n e ls. D ecid in g w h ic h typcts) o f channel lo use c a lls
for an alysin g custom er needs, establishing ciiantiel flhjectivcs, and id e n tify in g and e va lu atin g the m a jo r n ilc rn a -
liveSi including the types and num bers of Intermediaries

Involved in the chan net.
5. Effective channel management calls for selecting interme
diaries anti i rain ing and m m ivaiing them, th e goal is to
build a long-term partnership I hat ''ill he profitable for g j
channel members.
<>. Marketing channels a re characterised by ctm iinucus and
s o m e t im e s d ra m a t ic c h a iu fje .T lic c c o f this m o st im p o rta n t
trends are die gmwth of vertical markL'tinj; sj^tenis, liorr-
/oru,jl m ar& tfng sysieins, and ttitiltlchanncl mnrkeltng

sysi fin s.
7. At) marketing channels have die potential fur runOict liiii]
coiiipctition resulting fruni sucli sources [bsnaal incam pattbllity, poorly defined roles and rights* percepiual dif
ferences, and interdependent rcbtionsJiips. C om panies
can m anage conflict by striding, for sujierordmati' ôafs.
exchanîi^ people ^mqraf twq or more chantu-l levels, coojitinj; the supjiort LH leitders in different parts of [fie chan
nel, and tucourasii'if; joint m em bership In and h i tween
trade associ a lions.
.196
PART 6
DELIVERING VAUJE
fL Channel arralaments arc up iu lhe company but there

ate certain legal and ethical issues to be considered ivjili
regard to praciices such as exclusive dealing or territories,
tying agreements, and dealers' rights.
9, ii'cojnnmrce has gCmviJ in importance as companies have

adopted 'Uriel:-anti-click'1channel systems. Channel iiii-r^Ktiion must recognize lhe distinctive: shl-itîIi!> of online
and offline selling and maximize their joUll contributions.
a p p l ic a t io n s
M a rk e tin g D eb ate
:::
D ogs ii M atter W h e re You A rc S o lti?
Some marketers reel that the image of the particular channel

in w hich tliey sell ilie ir products does not m a ile r all thftt
mattets is that the ri^lu custom ers shop there and lhe product
is displayed in ih c right way. Others m aintain that channel
images such as a retail ilorc- can be critical and must be
cons istern with the Im a ^ of the product,
Take- j position: Channel images do not reallyfcffect the brand

images of the prod nets they sell that much versus Channel
images irhusl he consistent with the brand image.
M a rk e tin g D is c u s s io n
Think of your favorite reiLiilctrs. I Imv have thcy in le^ rated thc-ir
chajme! sy&imH? How would you tike (heir channels to beirnermcd'? you use multiple channels from them? Why?
AMAZON
M ARKETIN G SPO TLIG H T

'
'S i)
flmaion started as tt>e 'world's hrgesl bimkKtore" in July 199f>. It was a wr

it.jt booKslora that physical y ovvnad r;o books Many detractors wondered if
ine online grtannel was right tor books. Without browsing, as in a relfl.il slore,
row cciJitl took buyers decide whether they mi^nt l.ke a sook? Without a
fr enrlJy, knowledgeable siatl, howcould two*; buyers find lhe righl books? Tlie
only posilive SideOf lhe newchannel seemed lo beIttatAmazonwouldhe able
tn offer a vastly trader selection of titles than con'd he louPd in mosl local
bookstores.
Amazon look steps lo replicate the leaiures of a physics! taftstoie in ns
online cb^fiflel r-ftt id Tephcalcd the "friendly, WwwleiClljeable Stall advice
flWtigh reader took reviews, Anyone can Mitt pi review i>1 a book no Amazon.
r:i::.! these r...r;-A's hi.;i cuSK)(ners pick nooks A buill mranking system lets
browsers rank wludi reviews are helpful ond which are not. Some reirewers
even es^joy j k:no of fame, writing hundreds of reviews over lhe years add oarnering loyal lollaivers who gladly boy baoks baser; on iheir comments
Second, Amaron rt=;jlicaierrl the sErsnriifiilv of browsing by ollering j [*r
sciu'izerf recommendation service. Amazon leai.zed that if one person is L-jying the stme book as Brother person boi^t, tbs two people pmb.ihly share
Tiim tar ^'lafesls a;itl oufloote. Thus, the l-rst pcrsw might also he inlerosl'jil in
olter ujoks tbal the second person bought Amazon^ personal recommenda
tion se-vice aflfretfabes data on buying patterns la inler fecnrrnnendations ol
who migtd tikE v.lneh licet The result is a list nest to eveiy book saying "peop e who bought this uoc^ also bought the following books . . " inis irw.'tes
people to browse Amazon's virtual shelves.
Amazon is also tackling lhe last downside oi the virtual channel. fhe mmpony has sJarted to offer pee^ mlo hooks' contenls, index, and beginning
p.igsa. In 2DD3, Arrra/nn pushed |nc virtual Ctkailr al ev<:ii tui'ner. :itrccliK>!ii]
a 'search inside the bock" feature that lets C rom ers search me entire leit
oi 120,OK) booksabout as many lilies as tire m a Barnes E HoWe book
store. Tfie service >s Iree, allfinuqh cuslomets inns: r^giilET and h.nve a credit
card on file with Amazon. Customers type in a word, name, or phrase anti
they get a list oi the book pages in wiicn those words aopear. Cuslomets can
v ie w a........ .
d 1 th ? page and two p ^ e s on E it h e r s id e o f f, but t h e y tan*
nut print she results.

The Iniofnol channel lets Amazon do promotions Dial a physical boctatore
could no* L'o For example, during lh^ ?fU3 twliday .wason Amazon held a
star-studded promotion each riay, a celebrated actoi author, d-ructor mueidan. oi media personality oifered a pietc oi effiUJsive online conienl to
AnyCTrt.com Shoppes Iree n! chargc. For esinipfs, Michael J Fo* and Ja-:<
Biac'n tn inLuted original artwork Musicians !ik^ Brace Sprir^sisjen gave a
sneak peak of an upcoming conceit video and spcctai 'behind the scenes"
cofltenl
Amazon's goa' witti the promotion was lo delight tusromers and to drvc
trsflic and increase sates. So, the celebiilies also recommended one lo three oi
îe:r favorite produclS Hut were available dul Amaion.com They could rocommend Uisir Olvii CDs or movies, or I her could choose something lhal irêy
enjoyed ovv-mi'j Ihemselves. Having fhe participants recommend urcduLls i-ras
a (jreas way lo introduce shoppers lo items (hey could tvjy for me holidays
D E S IG N IN G
M A N A G I N G V A l UE N E T W O R K S A N D C H A M N E L S
S j I ii also altowect Eh&n ?o rje: soirE nsigl'il ir>io :h$ cels&niies n w3s a very
impactful promotion.' said Amazon spokesperson Emily Classman.
By keeping the schedule ol "appearances' secret, Amazon gave cus

tomers an incentive la come I p Hie sile daily lo see who would US mak^ng
the next appearance The pi amotion, along with the extended produd oiler
riQ ^r^rt Tree sinpp ng lor orders over S2&. Jave Aciazon ils busiest holiday
season evar. Mon iiian 2.1 million unite wena ordered in a Single flay 21
ilems per secand.
Amazon doesn't liave a retail presence, ana therefore doesn't need lo
rtturj
pricing U'ffLiruncf?? between online grd reiail stores, PlOta'Sars
who try to operate both channels run the fist ol channel ca n to 1
turt mars
between the online and physical fetal channels over snaring costs ie.<r..
marksling:-. price competition (if Ihe on line channe- undercuts Ihe physical
channel), ana siiaNnn profits (e.g., when a consumer near a pt^sitjl storE
Ihryj OnFine],
Go In m.iny Amnion pages and you will lirid used copies or Use Cjnc-ti Inr
sale aionsitJe r-Ew copies. These used boofcs are actually sold by mdepe^
dent used booksellers, nol by Amazon. Why (Joes Amazon cannibalize ils
own ncn-tiocit sales wilh sales of used Dwtts Ilia! it does not even own?
The key islhal llielransaclion fees and prclns far a sêti cook are not sim
ilar to ihe pfoiirs Imm new-book sales. Amazon's own new-btwk sales give
11 higher revenues Ilian helping someone else sell a used copy, hul Ihe
C H A P TER 15
4 ?9
ne:.'book sates also naw mtcti li'nhef costs. lmHie end, ti^lnmy otnefs 10
:;a:l used books brings in Oo'Ji more profits ami more customers to
Amazon's site.
Amazon doesn't fear the retail channel. In fad it gels revenue Oy Helping
traditional brick-and-modS retailers like Target .com and Koirisirgm and Tjys
"FI' Lfs en'er (rve online world Not only does Amazon êt a service tee lor
opening Hie online site, sui it also gets a cut o1 Ifse sales soi^l through Lhe
on in* diaone', Vifncb hci:pecl inaease ArrM?on s overall saieii revenues &y 33
perccm in 003 Fttf A n iaw l the channel is nol aboul biryinQ wiiulesale and
seiimg raiiiiift is about cr^ttng a retail ssnrtca channd lhat coanecis sell
ers 10 (^jnSuiT-iBrii
Dicuss!4h O u e stio n s
1. Wiat haw been the Key success laclors for Amgjcn?
2 M'.sre fi Amazon vulnerable? What should it W ^h out for?
3. What reccHnmen'rlai.aiis v;oiilO you make to senioi markeiing enecul-.ies
gc-ng for^'.-ard7 Wfiat should (he conipafiy be s<jre to do wilh ils marketing
&,.'rr EliîMh '.'.tst, *7w 5Ned11' Potentials, Fe&uary
lift ?a NiVWSrtamz,
'Anvuan eon'!, tii^l S&irch f ! K ulionL tatotmattift Managamen? Journal iJiinn^vFebn^r^ ZfflM) ia-'S. Chris fiijkjf. 'Snan Ubiarv.' r^ne, Hwcrrfljer 17.2003,p 06;
C/ntfwa L Wtltb, 'Awaron's Lump of Oki?- WSslmgtoniloBj.coin, Octcbe!' 35,2t03
notes
jn. liMnlthewMaa^jcrtii^RKl Overhatlfe its &HCofllniercei.'' Chain
storeAgf, January
p. >(.
1. iHtumn Muller. kK ffljn : The l:lHtf)(l V . lIit k An? RtdtJJJ,

ftw jiw H fcefc fanMfiry Zfc 2002, p. MG. MoleIhnl KuKirt tolw
Lmtrgtd Crom bankruptcy ofi May Q, ?oo:i.
:j. AnrwT, Cough Ian. Erin Anderson, l,oui? VV. Stern. nod <Ml<?l f El
Atlujy, MarJcrllilK t;li:inii[d)s, Othi(l. ItJppcr Saddle River, NJ;
PrefitJce ILiJI. 21XJI).
ii. t ni-ii-Fi W. Slirn lIiiJ KibTiim A. Wc!l7. "1 ho Rcvjdutton in
[>i-,lr rt>tIEicjin: CliaJlcil^tSatlJ O jlpgiluillllcs,'
h'ni)[><-
tim in g an; no. s
eza^fea.
lfl.
lldyiir. " I Iil' Only Company WnJ-Mar i R ia is r t-uHunir

Kovsmber 24, sw :t, pp. l^S-l 136. See alsn. Michael SUvwsleln
M
finding rJjt: rJji1Ntit1H |n n ii9 ii (ju iiq /: iNcvv VotV. NV
['orifullu, 200l{] .
11, Mikv Tnjy. "J;rdin Supply C ia in Id Demand tihjiln, a Nv\le^v of
the .^[;LrkiLtpl,iciLL,_ fiSN fltittiliiig Today. Odntm 11, 2ihih, pp. h-!).
4, I 01 ml iiisJj;hlfuJ nummary wactflTtlc iL'MMn-|iP*i(v I -mi

Anderson and Aifrije T. Coughlttn.'Channel M im gem tnl:
Snuchnfe (SovprnaSncc, and Relationship Monaewncnt,* in
lluiiillimtk o f Marketing, ClUttfd liy Ban VHrite mu) Ifrthin
Wens! by [Lundpn: Sage Publications, 2001 f, pp. 2ti-Z\~, See
iilsih, Curj' [.. Frsi'JcfO nfiniHTig^nil MaitOmf;Cli|itircl5pf
D iiirih iitlrn ' /tihnifi! o f ih f At<nieiUyt>f AtftihitirlJfStii'rtCL'x
27. lint 2 (1999): 226-240.
a. L RjVTttBrtd (k ilt)1, hithtilri/il \tarfarlittg: CttU'i drift
ed. (tipper Saddle Rher. M : Rttotfce I fall. 1991J. ch. ii.
12, ('rmglilan, Anderson. Stern, and Hl-Ansary, MarifttiitgQm ttittk,

pp. S-G.
4lJl
ii. Io ra iL'cJmjt::!! (ILsL'iiîuit of Iwiw sci%'icc-ttripon?d firms chntiw: m

tirlt'r intcmatioft#] nartets, s lt M. Krishna l-rranUUi, "5cnrf
Hlnfis International rttry-Modi; Approach: A Muditlwl
I nmvjt Limi-t
AimJ^ rtis Approadv"
uI
I M3): IU-L1D.
7. Itsnica Matema, "Sivc*i Smell o( Success *
H. Piiul E XurtrH; 111ci KranlcU C cjpc^ ei l lir? Customer El;i\

Escjipcd," Hatyant Hi/siue,ss A^n'Agpt'-lNlovembcr ^t)t>:tj: UHj-lttj.
fjs iic
lUniTtesi
Ttmct, OnrtbtT 17. S(lD:i, p. y j.

H. M :i:li11 WUdbcrgiX "Ml11ti-i-fs.i11IK-I [illHiiLLIM. Itiisiin>F SUcct'M.11;I
E Comnioirci.'," Electronic Qiitwteixe NfH*. Scpiurtibrt 16. itun,
13, t:(iT mktiirafifll mfoi mm inn

backward cliflrtnci-i,
Mariuitvtic
hilin-, "I l<m:-H'lnikt Waj^tCoUccrkm as n Rcvl'kp Chantich A
ntjeorulicul PieKj icctivn? init'rmiimntl fn tm n l t>fPhysical
Distribution anti LogiiticS2 5, no, 2 i l!W j): 3S-55; Terrance L
tîliluii ;irnl M.Theodnre l-'nrn^ II, "Reveist i.ui;ii[ii s. in p]astit?i
HetVLlin^.' jnttm alionfii fa m ta l o f H ijniail Qbtribititpn tmd
Lo g iitksT i, no. 7 i 1992k 35-3?,
N . Chris CaiihcrH"CthHnc f'C'i ihe Ijnoi," liosion Globe. April 22,
jOU3, p. F I.
IS.. Ir\iit^ ItL'in, lMiiti|i Ktnli-r. mul Muiini St<iller, High Kkib ilfty(,Ncw
York: flr.dd, Mead. t37).
I Li.. I:nilll ^ {ritiin.'llij'V cllaiv'i
March 24.2003, |îl W3-JSJ.
tJlLunilllu."
IT. I'fikcil from A rtI X tlCiil|;zll:Lii aild ImisW. SlurrL Majki'li=;
Chamvel Design and Manasenientr In Kellogg on JMarktslnn.

edited In1Dawn lawhiu-t-i (Neiv Vfirk: Jnlm Wiley, 2fl(ll i. p. 2J:).
SDO
PART 6
D E L IV E R IN G V A L U E
IK. Louis I: buckSIn. Gontpelitioii m il B/ptulion in ilpe Dhitiliuiitu

Trades flipperSaddle Hiver, ^ jz jpciuicc tlnil. t!:l72j. Abo see .Stern
iLinl IJ-Ansiir)1, Marketing Otmtmis.
Ml. [ jrntls. fi UiHrHin, A T fic a i^ p fO U lriltttlio n I'liriiirii-IS lru clttrc
UtL' rliL'k1v: Institute of Bu&tatssand EJwinomic Itase-aicb.

I liiiverslty ^ California. J&0GJ,
?0. Bridget Fmn, "A fjiin ri of Milk. ;i 1>i/<lii Ejgg$ and .t 2-ti-lll 1/
l-apmp," JfjripVifiiZli October2)003, p Sli.
I t . Maulbiiiv ijf Paula," Lkwk One UuTfs I[h Image. Caifl p FAvem)-,"
l)Sliaftki% February 2004, [l. 2(5.
'12. 'T ro tiid Sui[,H Tl)t> lA'irrium is!, jVtjVemEler 24, 21101, p. Sfi,
23. 'EixclHsivic* Becoming fit>?fniTiciTi Fnacdrc,' t?5W Helaiting Today,

February^, 2t 1, pp. :iB, 44,
2A. ctv^nv,disiK'V.cijni>: Edward Melrrgfc, "Mcdiaiyftw House of
MOUse Is H.IUIlletl by I:i] i ILI
t ilt i ilarnur, Fuhnuiy I I. 'Hilt) I.
j] Id.
2.R. For mere cm rehdfoniliip itiatkriing jjiJ rJiu govemwict Gf titarkîdtiy; L-liajinMLt.
Ian 11 lEt'itl-o. "brteroripnlxatiQiul
Governance in Market ing dianncls.* Journal of Marketing
Ilanuary 1ISM): 7l-fl>
2ti. LawitinccG. Friedman and iiinoUiy It. i'uiey, Zlw Cfitmttei
Adi/mHtiige: doing U? Marketing with Multiple Stilt# Omnnets
iW y iim , MAr BuItOrWLirth-] k']iicm:irm, 1E19EP. 1lley me^'M
Iroaikji fog a chim vds profitability by the expenMMo-rEvcmie
ratio, fir E/R. E/It is die s'i'iyaEc iransit^fan cost divided by die
average iiftlcr sImj. The average traniaetian ( i i i i [\ fntmd liy divid
ing tlie Kjial expense in operating the thsWCnd by the Lolal numlit-r i>l"Ira mint tio-ns. 'I'll*-- loivcr the E/H, the n n w proJitahle die
channel because less money k spout on selUiig ccî far uadi dol
lar of revemie.
27. Erlh Killian, hE!ii[lcr'Km IPp,' ftnrfjej, Iune9. 2W3. pp. 17r>']76.
211. <lmp: i I amerifeu:kyocera .com / 1icvvs/>.
33, Anderson anti O niglilui, "C hin titl Management hi mem re,
Gfivemano!, and RdnUOnsldp Mnrragement/1pp. 223-247.
3tl. T h n C U iw i of po^ct ,l1re idem Ilied In luhu it. E! French and
Uli IrLirn llinen, 1 lie Haws of Social E^Vei." ill StiiiiieSin Sndctl
JTtujnm; edited E>y Dfirîin Cartwright [Ann Arbnr: University of
Michigftn P r a j, WWi. fi|>. 150-187.
3 L Hurl Ri)st'i>blooin. MarkciittglChannwA Managtiwriit'wMi.5ih
tit. (Hinsdale. IE- ]lrv J lt i. I^H'jj.
32. Tnhi Elklti, "Apple G a m b l e s Ttolsil l^tr." AtlwriifiiigAgv.
tunc 3'l. $1)01i <hllp://VvwLv.4i}j|) Je.tDin J il>i :i it^>,
3^. Farnn excellem report oji nfii.< issue, see Howard Simon,
tilt fjurp^wfrryi Helling ttricl Dhlritnttinn Chnimris,
rL'MlitrcEi ru |ii >iI tee]. tLH.ri. ( jiinlvn'HL'f EI(^LIe3, HIMIi. p. 2(i.
34, Jartfly Ucttlt. More Banltsi I h^(| li ihiEI <i E l.ticiu's st.ikc fhetr
niiiini," A'l'ee' iofA- Intiiv, tcb m aiy 7, HOtM. p. I l l ; Itab til lulaviis,
"Dirnfnt ^ g jilu u liH i Eii.-t.iil El.iriLin^ Called Tcttlporu)1.''
AMfrimrt Banker, dctober 2, 2U(t:s, p. 2.
i r). Russuir lr)liiis[!Hiim J lJ:inl El- Lawrence, "BcyurKtVenJcal
lut(^r:iti(j|i: The UiiH uf rliu Valnc-AiltUng ParmtTsliip.' linriuirti
UtishmssBeiiatL'iJuly-Augiat lEiii}Lai iu l. Stealso, judy A.
SigtiBW, Penny M, StnipsEin, aFidTli-ontas l HaV:er, "ELffeciii of
StippllcrMarket Oricnlatton on TJisirih,iroi Murker UrienindW)

iLinl Itie ClirmiK'l ItdaUonshlp; The DLstribul wn Fcrspeed^p,'
toumaloffjark<!tit}}>duly iuflEl):!]3-Ll t; N^nki'Miri Naifljfandas
and Mandhar IJ. Knhvniii, "Long-Temi MiitiLifL'ien.Et-E.'t
Sli]>|iIll-t
Rdntluns)il|K: D d U ity !pjEy{)fffor Supplier RitHs?" fortrnai of
Mftrkrtiitg(Jajjltary
l-t(i; Ami liinvik tiivJ GcOije John,
When D o is lM c a l 0ttdLia|3aq IinjirDh'u Ihdnsirlai HmthasEEig
l?eEntionslil[iFi," fw rn n t o f Marketing &1 lOciolier ZOOOh: 5Z-tvl.
36. iiinvl.iiitl I Mo rEani'and U riu lf: Moran, MiLfkesin^ Hybrid
Marketing Systems.* Harvard Gusluass fieweii
(NtinreinheX''Decrnbe; i9St)): Mivif,r> Abo nt-E' Cordon s. Swaru:
mieeI lluivi:iEid T. Mririhiiy. 'M sratingAutamatlbEi Mteis the
C:Li|iiial PttdgelinH Wall." Marketing Manager/tout E. no. 3 ( ISK12):
SritEEwr HalaÊibrjiiiuiinii,"M:elI vdisejs Mall; ASlralefiit Analysis
Eit (jDCipoihian ftenveen piiecr MurkL'itTi midCdEivciHlnnil
HeiailLirM." Marketing Science 17. no. 3 (HJ^liE: ltll-lbH5.
H7. Paul Miller, "Mcrchatidljaf l>y MedJuinr Catalog Age,' |Liiit lfil()a,
pp. 31-95.
3 S . L r:
11jj;tn] : tci m u l S t e r n , " M a ik v li E ] ^ ( - Iie In in * l E ) l:s L h ii ; m d
M a n a g e iA tn t,* ]tp. 2'17-2jC9,
uti. M)^vhcc[y> "Ey-iLiI I'usliL'f!,,'

pp. 2Q5-20S,
O tu b cr )-i, jifioii,
!d l-'ibruon.L Multan and Alldft'EV J. liiilnn, "E'Uu lAiilvin'i JIeiIei i,f dK'
Inieriiei iii M.irkeling Stro.tefiy: An Explorator,'SctiEly," h t im a l u f
intemrtipv \torttstttg t^prlng ^tmi): fi-in,
IE, TEItiv aeciiutl dmi'.'inTn Stern and El-Ansary, M i)fluting Chem els,
Ch. ii. See a ho. Jonathan 13. Utbbard, Nlrmalya Kiuiiiii, and
[jiEijfi w Stern. "Esatnining iEil- lotpaci of DeitnjctiVi:Acts in
MarkeiJn^ Channel rtd^lanshLps,'' ftntrnttl o f Marketing
Re&tartit .'ifl IFcbruary 201) I J; 45-G l; Ktir.si E>. Antla aitsi Csry
I . Fouler, "The Severity o f Contract Enforcement En [iiierftriu
Channel Relation *tiips,~ laum nl o f Marketing ^ fOctober
ZOOJ); ri7-H I j Janies ft. êawn.Chckiiaji S. I>lv. nnd Dong-fin
jitfe, "Managing Marketing Channel OpportnnlsflK l'hc
Effklcn cy orAlmrnOtive Gtnvrnnncc McchanismS," Jo u tm il
OfMarkzltrigGA [April 2EEEII}, pp. S1-6S.
12. Allcssanilra CriillEjni.
Dac^m Fancy Knllirtg wilh C u ics "
HVili Strcit Ji'tt/tntl, A \.nil It), 2CH11, p. ESHE; "ThiujLtSviti" Thu
Hi'uiitntiist, No^rnbcr 2k, 2WK. p.
m vwteir[stftiiss.m >.
43, Gttg lEilni'ym. "(.Ir.iy Wail: SouIIh'eii (jilIEnrnte Ontiparle.iAnc
amomu the Many Upscale ManufncturersVoIclng 'E'ltL-ir
l)isplea>iire:LE](iiiL Middleirep DeliveringTheir Goods iptpihe
ti.nni^ni tiiiiiLiiliiiri/L'tl DiHciiEEEii t(<LE
. i n
l 1tines.
M.ielIi
EEMJ7, |>. BL. AEsii see I'.eeiI I!. MeMlngtr anti
(ibakravaTdil Nftrasimhun,-"IEas t\jwcrShifted in theGroeerj'
Q ian meIT Marketing Sd n trc I4,1iej. 2 (lS 9S): lfl!J-223M. U'jtliiirn (i. XikniEiiiEl ami WDiiunl J. Stanton,*llccydlngSolid
Wjiuhs: A ChannclSNor-DkirfbniiOrt HmMciii," fnttnuil nf
M/rrki 'ling ( In ly 1971)i ;1'1,
.IS-1 [EiiEiliLT t ittK i, ^LesstiiVi i.)i ihe Cyber Survivors." irm/iiewrrt'ppii:.
A pril 2 2 ,2.Q02, p. 42.
t:, DuiT Mi [3nr5ald, 'CustDiriLT, Suppurt Thystlf," Rttsimfss2,0, .-^pril
2l)tt4, p, 5ti.
D E S IG N IN G A N D M A N A G IN G V A L U E N E T W O R K S AM O C H A N N E L S
17, Sii'vi1iinfl-tnv, The Care and Fcttiluj; of :i Kilk-p App," Bittiness2.0.

Anjii i M Ii(]02, fj]h. 7fi-7E.
4a. Jtonnkl Ablrir, John S. Adams, and PHef Gould, Spatial

Orgpiiteittom: Thr Geographer's Wen1o f the World (Upper Sa^Jle
iilh'lt, NJ: Prtfitlce HhU. 1ST)}, |>|>. 5;ii-rtf2.
-13,
in UisUU' l-tu-1. Peppers and Rogers Group nmvslc[(4&

Slay H.2W U,
iiii. not) fade$ht.~llatv Harley Hewed Online Sates.41

Dccmfa& 2002 /January 2003, jt, -N.
2. 0.
C H A PTER 15
501
51. Giiry MtVVilliiims ;ind Aim Zimmerman, "Dell Pluns. up Peddle PCs
Inside Stars, Other Ijsrjii' Chqins/ Wult Street Journal, )andoiy30,

if ia i. pp. b i,b 3
n^. Pallavi Gofcul. "Ttie Not News in Banking: iiricts pud Mrtriiir,''
.\| >eji i i , atwa, pp. m -m .
53, LoiiisL1Le^, "Online Grocers: l-in-ally UoiivoriiiK the IjGUiicc ."
A p rilm . zooa, jj. <J7.
,ri i "2001 ImliLstry fo r f e it s ," Outdoor Pohvt iîutjiiwnl.

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C H A P T E R 15

S u c c e ssfu l v a lu e c re a tio n n e e d s s u c c e s s fu l v a lu e d e liv e ry . H o listic

isc o u n t chain K m a rt's r is e in th e 1 9 7 0 s w as c h a r a c te riz e d b y its

blue tight specials and fam o u s fo r infe m o usj in s t o r e a n n o u n c e

tions, an unfavo rab le im ag e, an d d e te rio ra tin g sa le s, Km art d e c id e d to try to

pany to drop the w idely d istributed S u n d a y n e w s p a p e r circulars that p r o

C h a p ter 11 b a nkrup tcy on J a n u a r y 22, 2002 , th e b ig g e s t retailer to have

A Blus Light Shop M in e kiosk at Kn art.

Marketing C han n els and Value Networks

to deals with larger discount chains such as Wal-Mart ci targetr

I he ability to return an o n lin e -o rd e re d product to a nearby store of the retailer.

*j Provide an inlortiLOlran centEr that is easy to navigate and

Smptemsifi a store iagaior tenure mat includes slots locations,

1ratn all sioru associates on processes for online merchandise

Ewd e-mail notihcalioms ol life order. Japping, and return crt^ir.

spent 43 percEnl more man dual-cJiannel shoppers,3

Htjjjfi-iavolvenieui Shoppers - Gntlicr

iiil& ntiation in ^Jl ch an n els, m ute liieir purchase in

DESIGN IN G a n d MANAGING VALUE NETW ORKS a n d CHAN NELS

Sales cnann^i tor Bmvte* fitness

fc*. i mlm r H a^U jcJu

P l l k J I l T f Cap S * * N /'it S W i r t s DIMIUHIECPI

equipment: a prini ad nffli p outran and

an 8DO number lor ptiocie calJa.

(a) Number of contacts

l i t The Role ol Marketing C hannels

W rit a DisUiimis! Increases E fkien cy

C hannel Fu n ctio n s and Flo w s

DESIGN IN G AND M ANAGING VAL 'E NETW ORKS AND CHANNELS

Develop ^no disseminale persuasive oommunicffllim 1o slimjlals purchasing

Place ofdets witti menulactuncfs

Assume risfcs connected rtiin carrying owl channel work.

i Itc fi-dihellngflows In tlin '.Lr-- imy Cl an t !l (or Fur- H <rncK^

(a) Consume r MiirVttnnj ClisruuHt

|b> Industrial Marketing Channels

Consumer amt Industrial Matkelsng Qianncis

D ESIG N IN G AND M ANAGING VALUL NETW ORKS AND CH AN N ELS

Consumers ant) businesspeople no longer need to be near a cam

The potential rnarkei &ppor| unities lor location bascri services

Coming home and clicking a combinai.on p! keys on the phone to

Some see posiiive benelits, s-jch as totaling people maki'-.n emer

learns thal an employee is fteing treated ler A lP S a i a fcctf clinic, or

tcusc products or containers (such as rcliliable chemical-carrying drums); (il) to rrfuvtnslt

S e rv ice S e cto r C hannels

Travelers cruscd an .nsurnnce, mutual funds, and investment banking busi

nkr: Welgr^ns and CVS Stores.

" I Chcrnnel-Design Decisions

A nalyzing C u sto m e rs' D esired S e rv ice O u tp u t L e v e ls

DESIGN IN G ANU MANAGING VALL.L NETW ORKS AND CH AN N ELS

EstabEishfng O b je c tiv e s and C o n strain ts

Identifying M ajor C hannel A lte rn a tiv e s

to carry on It# channel work.

A iim i needs to identify the lypeso f intermediaries available

IruinraiN'G markeliiig dianneEs Calyx and

DESIGN IN G a n d m a n a g i n g YALLiE n e t w o r k s a n d CHANNELS

Praruffll Aitemli'tfK for a Cellular

a The company could sSI its car phones In auto beaters

Ciu Rime Makar

Ii'.t tc push hgher-priced: cars. The customer is inform ?rl lhal

DESIGNING AND MANAGING VALUE NETW O RKS AND CHAN NELS

tiling jeans wear products 1 department nmn speedily siori?^.

Evaluating th e M ajo r A ltern a tfv es

DESIGN TNG AND MANA :1k

Although hundreds ol B2B echanges lailut!, $3 ii trill on wortii n C'comn xe was