Channels of Distribution: Conflict, Cooperation, and Management

Chapter Goals
To gain an understanding of: The nature and importance of intermediaries What a distribution channel is and does The decisions involved in designing a channel of distribution Major channels used to distribute consumer goods, business goods, and services Vertical marketing systems Intensity of distribution Choice of intermediaries and conflict management Legal considerations and channel arrangements
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Adversarial power relationships work only if you never have to see or work with the other party again.
-Peter Drucker

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Distribution Channel
What is a Distribution Channel? A set of organizations (intermediaries) involved in the process of making a product or service available for use or consumption by the consumer or business user. Used to move the customer towards the product

Selling through wholesalers and retailers usually is

much more efficient and cost effective than direct sales.

The Distribution Function

distribution is about getting the product or service to the customer as conveniently as possible; it deals with access and availability intermediaries perform many of the distribution functions on behalf of suppliers merchant intermediaries actually take title to physical products that they distribute agents do not ever own the products, but they arrange the transfer of title
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Distribution Channel Functions

Distribution Channel
Information Promotion Contact Matching Negotiation Physical Financing

Key Functions
Gathering and distributing marketing research about the environment Developing and spreading persuasive communications about an offer Finding and communicating with prospective buyers Shaping and fitting the offer to the buyers need Agreeing on price and terms of the offer so ownership or possession can be transferred Distribution: transporting and storing goods Acquiring and using funds to cover the costs of channel work Assuming financial risks such as the inability to sell inventory at full margin

Risk Taking

Distribution Channels
The role of distribution entails:

Arranging for its sale and transfer of title Promoting the product Storing the product Assuming some risk during distribution.

Intermediaries often perform these activities for producer or consumer.

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The Distribution Functions

SALES SPECIALIST FOR PRODUCERS Provides market information Interprets consumers wants Promotes producers products Creates assortments Stores products Negotiates with customers Provides financing Owns products Shares risks

I N T E R M E D I A R Y

PURCHASING AGENT FOR BUYERS Anticipates wants Subdivides large quantities of a product Stores products Transports products Creates assortments Provides financing Makes products readily available Guarantees products Shares risks

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Designing the Channel

Channel design is a strategic marketing tool. Four decisions can be help a firm design a distribution channel: what role distribution is to play in achieving objectives what type of channel is needed? with or without intermediaries? what level of intensity of distribution? which specific intermediaries to use? which will be best suited to achieve objectives?
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The Well-Designed Distribution Strategy

Specify the role of distribution within the marketing mix Select type of distribution channel Determine appropriate intensity of distribution

Choose specific channel members

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Selecting the Type of Channel

some firms will distribute directly; others will use a number of intermediaries: producerconsumer (direct) producerretailerconsumer producerwholesalerretailer consumer produceragentretailerconsumer produceragentwholesaleretailercons umer when would each of these be considered?
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Major Distribution Channels

For distribution of consumer goods, five different types of channels are widely used. Business goods are normally distributed through four major types of channels. There are only two common channels of distribution for services. Some producers are not content to use only a single distribution channel and use multiple channels (a.k.a dual distribution) Multiple channels can aggravate middlemen and cause conflicts in the channels.

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Consumer Channels
PRODUCERS OF CONSUMER GOODS

Agents
Merchant wholesalers

Agents
Merchant wholesalers

Retailers

Retailers

Retailers

Retailers

ULTIMATE CONSUMERS
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Number of Channel Levels

Channel Level - Each Layer of Marketing Intermediaries that Perform Some Work in Bringing the Product and its Ownership Closer to the Final Buyer. 0-level channel

Producer
1-level channel Producer 2-level channel Producer Retailer

Consumer

Consumer

Wholesaler Wholesaler

Retailer

Consumer Consumer

3-level channel Producer Jobber Retailer

Business Channels
PRODUCERS OF BUSINESS GOODS

Agents

Agents

Merchant wholesalers (industrial distributors)

Merchant wholesalers (industrial distributors)

BUSINESS USERS
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Service Channels
PRODUCERS OF SERVICES

Agents

ULTIMATE CONSUMERS OR BUSINESS USERS

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Customer Marketing Channels

Multiple Distribution Channels

some firms will use several distribution channels to reach specific markets or segments dual distribution is used, for example, to reach business and consumer markets, or to carry different groups of products or may be used to reach different segments of the sellers market; different sizes of buyers or different regions of the country some companies operate their own stores

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Vertical Marketing Systems (VMS)

a tightly coordinated distribution channel designed to improve operating efficiency and marketing effectiveness. Corporate VMS: One firm owns other firms in channel or the entire channel-- Goodyear, Roots. Contractual VMS: Independents work together for much greater effectiveness: IGA, IDA. Administered VMS: Relies on economic power of one channel member-- Rolex, Kraft General Foods..
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Innovations in Marketing Systems

Horizontal Marketing System Two or more companies at one channel level join together to increase coverage Example: Banks in Grocery Stores Hybrid Marketing System A single firm sets up two or more marketing channels to increase coverage Example: Retailers, Catalogs, and Sales Force

Intensity of Distribution

INTENSIVE Distribution through every reasonable outlet in a market

SELECTIVE Distribution through multiple, but not all, reasonable outlets in a market

EXCLUSIVE Distribution through a single wholesaling middleman and/or retailer in a market

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Considerations in Channel Choice

Market Considerations: Type of market, concentration, potential customers, order size. Product Considerations: Consider unit value, perishability, technical nature of product. Intermediaries Considerations: Services offered, availability, attitude, dominance. Company Considerations: Desire for channel control, management, money and services seller can provide to support sales.

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Channel Functions
Order Processing Warehousing Inventory Management Transportation

Design system to minimize costs of attaining objectives

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Transportation Modes
Nations largest carrier, cost-effective for shipping bulk products, piggyback

Rail

Truck
Flexible in routing & time schedules, efficient for short-hauls of high value goods

Water
Low cost for shipping bulky, low-value goods, slowest form

Pipeline
Ship petroleum, natural gas, and chemicals from sources to markets

Air
High cost, ideal when speed is needed or to ship high-value, low-bulk items

Integrated Logistics Management

Concept Recognizes that Providing Better Customer Service and Trimming Distribution Costs Requires Teamwork, Both Inside the Company and Among All the Marketing Channel Organizations. Cross-Functional Teamwork inside the Company Building Channel Partnerships

Third-Party Logistics

Conflict and Control in Channels

Channel conflict exists when channel members interfere with each others objectives. Horizontal conflict involves firms on same level-grocery store vs. drug store. Vertical conflict involves firms at different levels producer versus wholesaler producer versus retailer Channel Power is the ability to influence or determine behaviour of others in channel. Based on expertise, rewards and sanctions.
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Producer/Retailer Conflict
Small suppliers complaints about large department stores:
Onerous logistical demands. Pressure to cut prices. Demands to give the stores exclusivity. Forcing suppliers to contribute advertising and promotional dollars to the stores. Requiring suppliers to invest in elaborate computerized inventory systems.

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More Complaints
Small suppliers complaints about discounters: Being asked to supply their goods on consignment. Being asked to deal directly with the retailers headquarters and to give to the retailer an amount equal to the commission that would have gone to manufacturers agents. Responses from smaller suppliers: Quit doing business with big retailers whose demands are too strict and outlandish. Become a retailer. Merge with another manufacturer.
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Legal Considerations
Dealer Selection: Refusing to sell to some firms. Can be done carefully. Exclusive Dealing involves shutting out competitors, giving most business to one firm. Tying Contracts involves providing one item on condition other lines be carried as well. Exclusive Territories can create monopolies.

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Channels for Entering Foreign Markets

Exporting, through: An export merchant in the manufacturer's country that buys goods and exports them. An export agent located in either the manufacturer's or the destination country. A companys sales branches. Contracting, via: Licensing: Right to use production process, patents, trademarks, or other assets. Franchising. Contract manufacturing: having a foreign-based manufacturer produce the product
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More Foreign Market Entry Channel Options

Direct investment, including: Joint venture or partnership with a foreign company. Strategic alliance. Wholly-owned subsidiaries. Multinational corporation, in which the foreign and domestic operations are integrated and are not separately identified.

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The Changing Face of Distribution

Internet (click and mortar vs. brick and mortar) a major factor-- where is it heading? Direct Response TV sales are growing in popularity, especially for time-starved shoppers The worlds largest bookstore is on the Internet! (Amazon.com)

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