MKTG 450 Selected Topic in Marketing: Distribution Management Spring 2009, Dr. Stefan Wuyts Introduction: Channel Functions

Learning objectives Knowledge of “marketing channel and retail management” - Broad overview of the field - Insight into theories that have long been useful - Knowledge of and insight into the latest developments Learn how to apply theories to practical examples Learn how to read scientific literature Become aware of where to look for relevant readings Consult the syllabus for details!

You can help shape this course Do you encounter articles in the popular press that intrigue you and that are related to this course? Would you like to see them discussed during the course?  Provide me a copy of the article and I will include a discussion of this article into one of our upcoming classes.

Structure: Channel functions 1. Channel Management Channel design Vertical integration Contracts Partnerships Dark sides Power Connectivity and control 1. Channel Management Retailing Private labels Retail assortments Cooperation in retail Pricing Price promotions 2. Retail Management New trends Collaboration and competition in retail 3. New insights

Topics for today Positioning distribution strategy What is a marketing channel? Why relevant? Why do intermediaries exist? Types of intermediaries (readings: chapter 1)

Where is distribution strategy located in the hierarchy of strategies? Vision and Mission statement Outline the strategic domain Corporate strategy (Business strategy) Functional strategy

Examples of vision and mission statements: Highest level in strategic hierarchy Monsanto

MARKETING STRATEGY: Marketing strategy is a functional strategy that bridges corporate strategy and the marketing mix. Distribution strategy is part of marketing strategy, i.e. should be consistent with the strategic marketing objectives.

What is a marketing channel? (1) A set of interdependent organizations involved in the process of making a product or service available for use or consumption The P of “PLACE”

What is a marketing channel? (2) Manufacturer Marketing channel management Intermediary Retail management End user

Why is “marketing channel management” relevant? Marketing channels are behind every product and service sold Marketing channels are a key strategic asset through which a manufacturer can create a competitive advantage Differentiation Easier access to new markets Creation of entry barriers

Example: Dell versus Compaq (Wilson 2000)

Why do intermediaries exist? Eliminate discrepancies Distribution channels fulfill 4 important functions Reduce uncertainty Reduce contacts Routinization

Eliminating discrepancies Quantity discrepancy Make small quantities available Assortment discrepancy Adjust the assortment to the needs of the market/segment Time discrepancy Minimize delivery times Place discrepancy Offer an accessible location “Service outputs”

Why do intermediaries exist? Eliminate discrepancies Distribution channels fulfill 4 important functions Reduce uncertainty Reduce contacts Routinization

Reducing uncertainty 1. Reducing uncertainty for the end user Uncertainty about the quality of products/services (B-brands in particular)  Image/name of the intermediary = indication of what products are being sold there

Recall “context effects” from consumer behavior, applies also here: Information integration theory: attitudes are formed and modified as people receive, interpret, evaluate, and then integrate stimulus information with existing beliefs or attitudes. The more salient or accessible the attitude toward a store, the more likely it is that the individual will access that attitude upon observing cues associated with the store (such as unknown brands sold in that store)

Note: there are other approaches ‘unknown’ manufacturers may follow to reduce consumer uncertainty. Example: Intel. Microprocessors: 20-40% of PC manufacturing costs. 70’s and 80’s: only marketing aimed at design engineers of computer manufacturers. End of the 80’s: also marketing aimed at end users. Intel started helping OEM’s with financing marketing campaigns conditional on use of Intel microprocessors and use of Intel Inside logo in advertising.

End of 90’s: 2700 manufacturers were involved; >$7 billion invested in Intel Inside advertising by Intel and partners. Intel in top ten of most valuable brands next to Coke and Disney, among others.

2. Reducing uncertainty for the manufacturer Uncertainty about how to reach the right kind of end users  Image/name of the intermediary = indication of which end users shop there

Why do intermediaries exist? Eliminate discrepancies Distribution channels fulfill 4 important functions Reduce uncertainty Reduce contacts Routinization

Reduce contacts Philips Sony JVC Panasonic Philips Sony JVC Panasonic

Why do intermediaries exist? Eliminate discrepancies Distribution channels fulfill 4 important functions Reduce uncertainty Reduce contacts Routinization

Routinization Purchase transaction routine for end users Philips Purchase transaction routine for end users every link requires negotiation more expensive for manufacturer Philips Purchase transaction = routine for intermediary  cheaper for manufacturer

Types of intermediaries (1) Agents Sell to other intermediaries or to business end users Intermediary End user Manufacturer Wholesalers Sell to other intermediaries or to business end users Retailers Sell to individual consumer end users

Types of intermediairies (2) Do NOT take title to the goods Agents Do NOT take title to the goods Wholesalers Take title to the goods Retailers Take title to the goods

Examples of channels (1) Direct channel Retailer channel Wholesale channel Agent channel Manufacturer Manufacturer Manufacturer Manufacturer Agent Wholesaler Wholesaler Retailer Retailer Retailer Consumer Consumer Consumer Consumer

Examples of channels (2) beer brewer wholesaler pubs restaurants supermarkets consumers

Important questions How to structure the channel? a direct or an indirect channel? number of channels: one or more? number of distributors: many or few? How to coordinate the channel? vertical integration or outsourcing? contracts: detailed or not? Partnerships: yes or no? how to deal with power?