Chapter 6 Designing the Marketing Channel**

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

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

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

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

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

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

Three 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) Topic 3 6 Distribution Channel Tasks (Functions) 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!

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

Allocating Five Marketing Functions in an Automobile Channel* Exhibit 3.1 Suppliers Physical Function Title Function Payment Function Customer Transporters Warehouses Manufacturer Dealers Transporters Banks Transporters Warehouses Banks Transporters Banks Advertising Agency Customer Customer Information Function Customer Promotion Function Customer Advertising Agency ©McGraw-Hill Companies, Inc. 2002

Role Classifications for Different Types of Wholesalers 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 Yes Yes No Yes Yes Yes No No Yes Yes Yes No Yes Yes Exhibit 2.3

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

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

1. Number of Channel Levels 6 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

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

Industrial Channel Design Manufacturer Zero-level One-level Two-level Three-level Industrial User 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 Relationship between the intensity of distribution dimension & number of retail intermediaries used in a given market area Intensity Dimension Intensive Selective Exclusive Numbers of Intermediaries (retail level) Many Few One

3. Types of Channel Intermediaries 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) Converge: electronic components

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

Variables Affecting Channel Structure 6 Variables Affecting Channel Structure Categories of Variables Market Variables* Product Variables* Company Variables* Intermediary Variables Environmental Variables

1. Market Variables Market Geography Location, geographical size, 6 Market Geography Location, geographical size, & distance from producer Market Size Number of customers in a market Market Density Number of buying units (consumers or industrial firms) per unit of land area Market Behavior Who buys, & how, when, and where customers buy

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

3. Company Variables Size The range of options is 6 Size The range of options is relative to a firm’s size Financial The greater the capital, the Capacity lower the dependence on intermediaries Managerial Intermediaries are necessary Expertise when managerial experience is lacking Objectives Marketing & objectives may & Strategies limit use of intermediaries

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

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

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

Break-even Cost analysis: Company Sales Force and a Manufacturer’s Sales Agency Costs Manufacturer’s Sales Agency Company Sales Force Level of Sales Se Sales Cost Sales volume Exhibit 3.3 ©McGraw-Hill Companies, Inc. 2002

Various Approaches for Choosing Channel Structure Topic 5 6 Various Approaches for Choosing Channel Structure “Characteristics of Goods & Parallel Systems” Approach* (Table 6.2 on p. 207) Financial Approach Transaction Cost Analysis Approach* Management Science Approaches Judgmental-Heuristic Approach

“Characteristics of Goods & Parallel Systems” Approach* 6 “Characteristics of Goods & Parallel Systems” Approach* Characteristic Red Goods Orange Goods Yellow Goods Replacement Rate High Medium Low Gross Margin Adjustment Time of Consumption Searching Time Ex) Yogurt Luxury Car

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” = Direct channel “Buy” = Indirect channel

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

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 Frequency of transactions Ex) Fashion Apparel (e.g., Nicole Miller)

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

Judgmental-Heuristic Approaches 6 Judgmental-Heuristic Approaches IF Management’s ability to make sharp judgments is high + Good empirical data on costs and revenues is available It’s possible to make highly satisfactory channel-choice decisions using judgmental-heuristic approaches Ex) Qualitative Judgment Approach Weighted Factor Score Approach Distribution Costing Approach

Three Steps To Take for Selecting the Best Channel Design* Topic 6 Three Steps To Take for Selecting the Best Channel Design* 1. Analyzing Channel Objectives and Product Characteristics: 2. Analyzing Desired Channel (Service) Output Utilities: 3. Analyzing Market Behaviors and Segments ©McGraw-Hill Companies, Inc. 2002

1. Analyzing Channel Objectives and 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

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

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