Marketing Channels Understanding Consumer and Business Chapter 10

Supply Chains and the Value Delivery Network Producing and making products available to buyers requires building relationships with “upstream” and “downstream” supply chain partners. Upstream: Firms that supply the raw materials, components, parts, and other elements necessary to create goods. Downstream: Marketing channel partners that link the firm to the customer. 10- 2

Supply Chains and the Value Delivery Network This network is made up of the company, suppliers, distributors, and ultimately customers who all cooperate to improve the performance of the entire system in delivering customer value. Marketing channels represent the downstream side of the value delivery network. Channel decisions affect other marketing decisions and can lead to competitive advantage.

Marketing Channels A set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business users.

Nature and Importance of Marketing Channels How channel members add value: The use of intermediaries results in greater efficiency in making goods available to target markets. Channel members offer the firm more than it can achieve on its own in terms of: Contacts. Experience. Specialization. Scale of operation. See next slide… 10- 5

Figure 10.1: How Adding A Distributor Reduces the Number of Channel Transactions

Key functions performed by channel members Information: Gathering and distributing marketing research information and intelligence about the marketing environment needed for planning and understanding the market. Promotion: Developing and spreading persuasive communications about an offer. Contact: Finding and communicating with prospective buyers. Matching: Shaping and fitting the offer to the buyer’s needs. Negotiation: Reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred. Physical distribution: Transporting and storing goods. Financing: Acquiring and using funds to cover the costs of the channel work. Risk taking: Assuming the risks of carrying out the channel work (e.g. storing).

Number of Channel Levels A channel level is each layer of marketing intermediaries that performs some distribution work. The number of intermediary levels indicates the length of a marketing channel. (see next slide…) Based on the number of levels, a channel can be Direct or Indirect: Direct marketing channel has no intermediary levels; the company sells directly to consumers (direct marketing). Indirect marketing channel contains one or more intermediaries. From the producer’s point of view, a greater number of levels mean less control and greater channel complexity.

Figure 10.2: Customer and Business Marketing Channels

Channel Behavior A marketing channel consists of firms that cooperate to achieve their common goals. Each channel member depends on the others in the channel. Each channel member plays a specialized role in the channel. The channel will be most effective when each member assumes the tasks it can do best. Disagreements over goals, roles, and rewards may create channel conflict. Two types: Horizontal conflict occurs among firms at the same level of the channel (e.g. retailer to retailer). Vertical conflict occurs between different levels of the same channel (e.g. wholesaler to retailer).

Channel Organization: Vertical Marketing Channels Vertical Marketing Channels are two types: Conventional distribution channel: Consists of independent producers, wholesalers, and/or retailers, each as separate business, seeking to maximize their own profits even at the expense of interests of the system as a whole. Vertical marketing system (VMS): A distribution channel structure in which producers, wholesalers, and retailers act as a unified system. One channel member owns the others, or has contracts with them, or even has so much power that they must all cooperate. 10- 11

Figure 10.3: Comparison of Conventional Distribution Channel with Vertical Marketing System

Channel Organization: Types of vertical marketing systems “VMS” Corporate VMS. Contractual VMS. Franchise organization. Administered VMS. 10- 13

Channel Organization: Types of vertical marketing systems “VMS” (cont’d) Corporate VMS: Combines successive stages of production and distribution under a single ownership. Channel leadership is established via common ownership. Contractual VMS: consists of independent firms, at different levels of production and distribution, who join together through contracts to obtain more economies or sales than they could achieve alone.

Channel Organization: Types of vertical marketing systems “VMS” (cont’d) Franchise organization: is a common form of contractual VMS in which a franchisor links several stages in the product-distribution process. Types of franchise organizations: Manufacturer-sponsored retailer franchise Example: Ford and its network of independent franchised dealers who sell to final consumers. Manufacturer-sponsored wholesaler franchise Example: Coca‑Cola licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup and then bottle and sell the finished product to retailers in local markets. Service-firm sponsored retailer franchise Example: The car-rental business (Avis), the fast‑food service business (McDonald’s).

Channel Organization: Types of vertical marketing systems “VMS” (cont’d) Administered VMS: leadership is assumed not through common ownership or contractual ties but through the size and power of one dominant channel members.

Channel Organization: Horizontal Marketing System & Multichannel distribution system Two or more companies, at one level, join together to follow a new marketing opportunity. Multichannel distribution system: Occurs when a single firm sets up two or more marketing channels to reach one or more customer segments. Also called hybrid marketing channel system. Offers many advantages. See next slide…

Figure 10.4: Multichannel Distribution System

Changing Channel Organization: Disintermediation Disintermediation: Occurs when product or service producers cut out intermediaries and go directly to final buyers, or displace resellers with radically new types of intermediaries. Example: Airline firms sell tickets directly to consumers via the Internet (donkeying travel agents). Disintermediation presents both problems and opportunities for both producers and resellers. Resellers and intermediaries must innovate to avoid the risk of disintermediation, thus survive. Producers must seek additional direct channels to remain competitive, though channel conflict often arises.

Channel Design Decisions Marketing channel design: is designing effective marketing channels by: Analyzing consumer needs Setting channel objectives Identifying alternatives Evaluating major alternatives. Firms often struggle between what is ideal and what is practical. 10- 20

Channel Design Decisions (cont’d) Analyzing consumer needs: main questions to be addressed: Do consumers want to buy from nearby locations or are they willing to travel? Do they want to buy-in person, by phone, or online? Do they value breadth of assortment or do they prefer specialization? Do consumers want many add-on services? Firm must balance needs against costs and consumer price preferences.

Channel Design Decisions (cont’d) Setting channel objectives: Objectives are stated in terms of targeted levels of customer service. Channel objectives are influenced by: Cost of customer-service requirements. Nature of the company. The firm’s products. Marketing intermediaries. Competitors. Environment.

Channel Design Decisions (cont’d) Identifying major alternatives: A firm should identify the types, number, and responsibilities of channel members available to carry out its channel work. Types of intermediaries: Retailers, “value-added” retailers, independent distributors, dealers, …etc. Number of marketing intermediaries to use: (1) Intensive, (2) selective, or (3) exclusive distribution. Responsibilities of channel members, include: Price policies, conditions of sale, territorial rights, and specific services to be performed by each party. 10- 23

Channel Design Decisions (cont’d) Evaluating major alternatives: involves comparing each alternative in terms of: Economic criteria, a company compares the likely sales, costs, and profitability of different channel alternatives. Control issues means deciding how much control to give, and to whom. For example, the level of control a company will maintain over its product in the channel depends on its marketing strategy. Giving the channel some control over the marketing of the product can be preferable. Some intermediaries may take more control than others. Adaptive criteria means the company wants to keep the channel flexible enough so that it can adapt to environmental changes in the long term.

Designing International Channels Channel design for international markets can be very challenging, because: Each country has its own unique distribution system, which is sometimes hard to penetrate. Distribution systems can be very complex with many layers and a large number of intermediaries. Distribution systems in developing countries may be scattered or inefficient. Customs and government regulation can restrict distribution in global markets. 10- 25

Channel Management Decisions Marketing channel management: involves selecting, managing and motivating individual channel members and evaluating their performance. Selecting Channel Members: a company should apply appropriate selective criteria to select the right intermediaries. Managing and Motivating Channel Members: channel members are partners and must be well managed and motivated for high performance. Most companies practice strong partner relationship management (PRM) to build long‑term partnerships with channel members. Evaluating Channel Members: a company should assess channel Members’ performance periodically, and reward intermediaries who perform well and add good value for consumers. Those who are performing poorly should be assisted or replaced.

Public Policy and Distribution Decisions Laws affecting channel decisions seek to regulate this business to ensure smooth running of the economy. Firms might use illegal tactics that could harm the interests of other firms and the economy at large. What can be legal in one country may not be as such in another country. The main legal issues include: Exclusive distribution occurs when a seller allows only certain outlets to carry its products. Exclusive dealing occurs when a seller requires that these dealers not handle competitors’ products. Exclusive territorial agreements occur when a producer agrees not to sell to other dealers in a given area, or the buyer may agree to sell only in its own territory. Full-line pricing occurs when a producer of a strong brand sells it to dealers only if the dealers will take all items of the line. It is called a tying agreement if dealers will have to take only one other item. 10- 27

Marketing Logistics and Supply Chain Management Marketing logistics (physical distribution): is planning, implementing, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit. Goal of Marketing logistics: is to provide a targeted level of customer service at the least cost. 10- 28

Marketing Logistics and Supply Chain Management (cont’d) Marketing logistics involves: Outbound distribution: moving products from the factory to resellers and ultimately to customers Inbound distribution: moving products and materials from suppliers to the factory Reverse distribution: moving broken, unwanted, or excess products returned by consumers or resellers. Supply chain management: is managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers.

Figure 10.5: Supply Chain Management

Marketing Logistics: Why is it Important to companies? Greater emphasis is placed on logistics because: Firms can gain a competitive advantage when logistics result in better service or lower prices. Improved logistics can lower costs. Increased product variety has created a need for improved logistics management. Improvement in information technology has created opportunities for major gains in distribution efficiency. Logistics affect the environment as well as the firm’s environmental sustainability efforts. 10- 31

Major Logistics Functions Warehousing: a company must decide on how many and what types of warehouses it needs and where they will be located. Examples: Storage warehouses store goods for moderate to long periods. Distribution centers are designed to move goods – not store them. Inventory Management: Balance between too much and too little inventory. For example, companies use Just-in-time logistics. Just-in-time logistics systems: Producers and retailers carry only small inventories, often only enough for a few days of operations. Transportation: Trucks, Railroads, Water carriers, Air, Pipelines (a specialized means of shipping petroleum, natural gas,…), Internet (carries digital products via satellite, cable, or phone). Logistics Information Management: managing data between organizations

Integrated Logistics Management Integrated Logistics Management is the logistics concept that emphasizes teamwork, both inside the company and among all the marketing channel organizations, to maximize the performance of the entire distribution system.

Integrated Logistics Management (cont’d) Integrated Logistics Management requires: Cross-Functional Teamwork Inside the Company (e.g. permanent logistics committees, made up of managers from different functions responsible for different physical distribution activities). Building Logistics Partnerships: establishing strong relationships with logistics partners. Partners can also consider Shared projects, allowing key suppliers to use their own facilities. Third-Party Logistics (3PL) (Also called outsourced logistics or contract logistics.): is outsourcing to third-party logistics providers Companies use third-party logistics providers for several reasons. These providers can often do it more efficiently and at lower cost. Outsourcing logistics frees a company to focus more intensely on its core business. Integrated logistics companies understand increasingly complex logistics environments.