Chapter 6 Designing the Marketing Channel**

6 Major Topics for Ch. 6 1.Channel Design Paradigm (7 steps)** 2.Channel Goals** 3.Properties of Channel Tasks (Functions)** 4.Three Dimensions of Channel Structure** 5.Three Main Approaches for Choosing a Channel Structure** 6. Three Analysis Steps to Consider for Selecting the Best Channel**

Channel Design 6 Topic 1: Decisions involving the development of new marketing channels either where none had previously existed or to the modification of existing channels C hannel D esign:

6 Channel Design 1.A decision made by the marketer 2.The creation or modification of channels 3.The active allocation of distribution tasks in an attempt to develop an efficient structure* 4.The selection of channel members* 5.A strategic tool for gaining a differential advantage Key points of the definition include:

6 Who Engages in Channel Design?* Producers, manufacturers, service providers, franchisors Look down the channel toward the market Look up the channel to secure suppliers Look both up and down the channel Firms (Manufacturers) Wholesalers Retailers * Who is missing here?

6 Channel Design Paradigm** (Seven Step Process) 1.Recognize the need for channel design decision 1.Recognize the need for channel design decision 7. Select channel members 7. Select channel members 5. Evaluate relevant variables 5. Evaluate relevant variables 6. Choose the “best” channel structure 6. Choose the “best” channel structure 2. Set & coordinate distribution objectives 2. Set & coordinate distribution objectives 3. Specify distribution tasks 3. Specify distribution tasks 4. Develop alternative channel structures* 4. Develop alternative channel structures*

6 Distribution Objectives (Goals) Topic 2 Setting distribution objectives requires knowledge of which objectives & strategies may impinge on these distribution objectives.

Three Key Channel Goals* Efficiency: “ no better alternative is available that is universally preferred ” Control vs. Flexibility Internal Cohesiveness vs. External Adaptiveness Learning and Knowledge * Intermediate Goals

Distribution Channel Tasks (Functions) 6 Topic 3 Outlining distribution tasks is specific and situationally dependent on the firm. For example: Distribution tasks for a manufacturer of consumer products differs from those for industrial products. Distribution tasks are a function of the distribution objectives and the types of firms involved. =

Channel Tasks (Functions)* This is a generic list of functions! Major Channels Functions (Tasks) Physical Possession Ownership Promotion Negotiation & Pricing Financing Risking Order Processing Payment Collection

Properties of Channel Tasks (Functions)** Usually performed better through specialization Can be shifted among channel members Invariably use someone ’ s resources* Key Question: Who can do the best job?  Matching! (channel functions with channel members)

Costs Associated with channel functions Physical Possession: Storage and delivery cost Ownership: inventory carrying cost Promotion: personal selling, advertising, sales promo, PR Negotiation: time and legal cost Financing: credit terms, terms and conditions of sale Risk Taking: warranty, insurance, repair Ordering: order-processing cost Payment: collection, bad debt cost

13 Allocating Five Marketing Functions in an Automobile Channel* Information Function Promotion Function Custome r Advertising Agency Suppliers Physical Function Title Function Payment Function Custome r Transporters Warehouses Manufacture r Transporter s Warehouse s DealersTransporters ManufacturerDealers BanksManufacture r BanksDealer s Banks Transporter s Warehouse s Banks Manufacture r Transporter s Warehouse s Banks Dealer s Transporter s Banks Manufacture r Advertising Agency Dealer s Exhibit 3.1 ©McGraw-Hill Companies, Inc. 2002

Role Classifications for Different Types of Wholesalers Wholesaler Classification Take Physical Possession Take Title to Goods Negotiation Function Performed Promotional Function Performed Merchant Wholesaler Manufacturer’s Sales Organization Agents/Brokers Commission Merchants Yes Yes No Yes Yes Yes No No Yes Yes Yes No Yes Yes Exhibit 2.3

6 Three Key Dimensions of Channel Structure* Topic 4 2. Number of levels in the channel 1. Intensity at the various levels 3. Types of intermediaries at each level Allocation Alternatives

16 The Elements of Channel Design** Three Dimensions of Design Variation: –Number of intermediaries at each level.  Channel Intensity Issue –Number of levels in the channel.  Channel Level Issue –Types of intermediaries used at each level.  Channel Ownership and Function issue ©McGraw-Hill Companies, Inc. 2002

6 1. Number of Channel Levels Range from zero to five or more Number of alternatives is limited Limitations result from the following factors: –Particular industry practices –Nature & size of the market –Availability of intermediaries

18 Consumer Channel Design Producer Zero-level One-level Two-level Three-level Consumer Retailer Wholesaler Agent Number of Levels Exhibit 3.2 ©McGraw-Hill Companies, Inc. 2002

19 Industrial Channel Design Manufacturer Zero-level One-level Two-level Three-level Industrial User Industrial Distributor Manufacturer’s Representative Number of Levels Manufacturer’s Salesforce Exhibit 3.2 ©McGraw-Hill Companies, Inc. 2002

2. Intensity at the Various Channel Levels 6 Intensive Selective Exclusive Many Few One Intensity Dimension Numbers of Intermediaries (retail level) Relationship between the intensity of distribution dimension & number of retail intermediaries used in a given market area

6 3. Types of Channel Intermediaries Numerous types* Manager’s emphasis on types of distribution tasks performed by these intermediaries Watch emerging types –Electronic online auction firms (eBay) –Industrial products sold in B2B markets (Chemdex, Converge.com)

22 Channel Ownership and Function: Types of Intermediaries Manufacturer ’ s own sales force (direct) Online channel (direct) Manufacturer ’ s representatives (indirect) Industrial distributors (indirect) ©McGraw-Hill Companies, Inc. 2002

6 Variables Affecting Channel Structure 1.Market Variables* 2.Product Variables* 3.Company Variables* 4.Intermediary Variables 5.Environmental Variables Categories of Variables

6 Market GeographyLocation, geographical size, & distance from producer Market SizeNumber of customers in a market Market DensityNumber of buying units (consumers or industrial firms) per unit of land area Market BehaviorWho buys, & how, when, and where customers buy 1. Market Variables

2. Product Variables 6 Bulk & Weight Perishability Unit Value Degree of Standardization Technical versus Nontechnical Newness

3. Company Variables 6 SizeThe range of options is relative to a firm’s size FinancialThe greater the capital, the Capacitylower the dependence on intermediaries ManagerialIntermediaries are necessary Expertisewhen managerial experience is lacking ObjectivesMarketing & objectives may & Strategieslimit use of intermediaries

4. Intermediary Variables 6 AvailabilityAvailability of intermediaries influences channel structure. CostCost is always a consideration in channel structure. Services Services that intermediaries offer are closely related to the selection of channel members.

6 5. Environmental Variables The impact of environmental forces is a common reason for making channel design decisions. Economic Sociocultural Competitive TechnologicalLegal

29 How Do You Evaluate Alternative Channel Designs?* Channel Goals: Channel efficiency and effectiveness –Expected sales and costs*  value –Control and required resources –Flexibility –Learning and Knowledge ©McGraw-Hill Companies, Inc. 2002

30 Break-even Cost analysis: Company Sales Force (direct channel) and a Manufacturer ’ s Sales Agency (indirect channel) Sales Costs Manufacturer’s Sales Agency Company Sales Force Level of Sales SeSe Exhibit 3.3 ©McGraw-Hill Companies, Inc Sales volume Sales Cost

Topic 5 Three Approaches for Choosing a Channel Structure 6 1.“Characteristics of Goods & Parallel Systems” Approach* (Table 6.2 on p. 207) 2.Transaction Cost Analysis Approach* 3.Firm Capability-based Approach

“Characteristics of Goods & Parallel Systems” Approach* 6 CharacteristicRed GoodsOrange GoodsYellow Goods Replacement Rate HighMediumLow Gross MarginLowMediumHigh AdjustmentLowMediumHigh Time of Consumption LowMediumHigh Searching TimeLowMediumHigh Ex) Yogurt Luxury Car

33 Transaction Cost Analysis (TCA)* Focus: Acheiving Highest Economic Efficiency Costs occur whenever firms perform channel “ functions ” –Fixed and variable components. TCA states that firms should purse the most efficient channel arrangement based on cost avoidance. –“ Make ” option = Direct channel –“ Buy ” option = Indirect channel

34 The Continuum of Interfirm Exchange Format* Hierarchy (Make) Franchise Systems Buying Groups Market Setting (Buy) * My latest thought on continuum

35 Key Assumptions and Dimensions of TCA** Channel members negotiate, monitor, and enforce exchange aspects by considering: Two assumptions –Bounded rationality –Opportunism Three transaction dimensions –Uncertainty (Internal and External) –Specificity of assets/resources –Frequency of transactions Ex) Fashion Apparel (e.g., Nicole Miller)

36 Choosing Internal versus External Transactions* Conditions for choosing “ Make ” (Internal = Using Your own salesforce or shop) over “ Buy ” (external = Using independent distributor): –A high level of environmental uncertainty should exist in the transaction cost assessment. –The assets involved should be highly specialized and unique to the exchange process. –The transaction should occur frequently. Examples: Sherwin-Williams; Curtis Mathes Third Breed: Clan Mechanism; Partial Integration

Firm Capability-based Approach 6 A firm’s own capability to perform a function V Internalize the function! IF Outside suppliers’ capability

38 Three Steps To Take for Selecting the Best Channel Design* 1. Analyze Channel Objectives and Product Characteristics: 2. Analyze Desired Channel (Service) Output Utilities: 3. Analyze Market Behaviors and Segments ©McGraw-Hill Companies, Inc Topic 6

39 1. Analyzing Channel Objectives and Product Characteristics Channel Objectives Product Characteristics –Unit value: length –Standardization: length, intensity –Bulkiness: length –Complexity: length, intensity –Stage of Product Life Cycle: intensity, ownership  Implications for level, intensity, and ownership and function ©McGraw-Hill Companies, Inc. 2002

40 3. Analyzing Market Behaviors and Segments Current and potential buyer behaviors: –Who is doing the buying? Where,when and how end users buy: –Seasonal –Shopping from home Knowledge of industry (and its language) ©McGraw-Hill Companies, Inc. 2002

41 2. Analyzing Desired Channel Output Utilities Lot size utility Convenience (time/spatial) utility Assortment/Variety Utility Service utility ©McGraw-Hill Companies, Inc. 2002