1. Chapter 10 Place and Development of Channel Systems
Marketing 333
Chapter 10
Place and Development
of Channel Systems

2. The Place Component of the Marketing Mix:
Channels of Distribution
Logistics
Materials Management
Physical Distribution

3. Strategy Decision Areas in Place
This slide relates to Exhibit 10-1 and the material on pp See also Transparency 74 and Overhead 100.
Type of
channel
physical distribution
facilities needed
How to manage
channels
Middlemen/
facilitators needed
Degree of market
exposure desired
Indirect
Direct
Place objectives
Customer
service
level desired
Summary Overview
Place is the part of the marketing mix, the 4Ps, that deals with making goods and services available in the right quantities and locations when customers want them.
Strategy Decision Areas in Place
Channel of Distribution. A channel of distribution refers to any series of firms or individuals who participate in the flow of products from producer to final user or consumer. How best to choose among the alternative channels that might be used and how to organize the activities in the chosen channel are key strategy decision areas.
Place Objectives. Place objectives can be derived from product class descriptions. This is a logical relationship as different levels of customer urgency, convenience, and product information-needs naturally suggest different place needs as well.
Choosing Place Arrangement. Just as the same product can be categorized as both a consumer and a business product, more than one place arrangement may be appropriate, indeed needed, to reach different target markets effectively. Marketing managers must recognize this possibility when designing place systems.
Long-Run Effects. Place decisions are usually harder to change than those made for the other components of the mix. In part, this is because much of the place strategy may be carried out by other firms in the channel of distribution. But even for company-owned channels, place decisions are not easily changed. Gaining access to desired retail space or outlets typically involves a great deal of time and then is bound by contractual arrangements.
Exhibit 10-1
10-3

4. The Channel of Distribution
A channel of distribution consists of producer, consumer and any intermediary organizations that are aligned to provide a means for passage of title or possession of the product from producer to consumer.
The channel is a system of interdependency that facilitates the exchange process.

5. Distribution Channels: Direct
Example:
Producer
Holiday Inn
Consumer

6. Why a Firm May Want to Use Direct Channels
Greater Control
Why a Firm May Want to Use Direct Channels
This slide relates to the material on pp
This slide leads into the next one which discusses why channel specialists may be needed to reduce discrepancies and separations.
Lower Cost
Some
Reasons
for Choosing
Direct Channels
Value added subsequent to
production process
Direct contact with
Customer Needs
Quicker Response or
Change in Marketing Mix
Summary Overview
Marketing channels can be direct or indirect. Direct contact with customers helps a company keep abreast of market changes. Often, this is a preferred way of handling place decisions. However, some products require the work of specialists to match producer output to user needs.
Channel Systems May be Direct or Indirect
There is not a single “correct” answer as to when direct distribution is better or worse than indirect distribution. A number of factors may need to be considered.
Direct Distribution Can Have Advantages
Many firms prefer to distribute their products direct to the final customer or consumer. One reason is to get better control over the whole marketing job; independent middlemen with different objectives may not meet the firm’s need. And sometimes the good middlemen are not available because they are already happy handling a competitor’s product.
The Internet is making direct distribution easier for many firms. Even a small company can establish a web page and draw customers from all over the world.
A firm in direct contact with customers is more aware of changes in customer attitudes and what it takes to insure customer satisfaction.
But in Many Situations Indirect Distribution is Best
Customers may already have established buying patterns and like to deal with a convenient middleman, or middlemen may have more information about the market, or sometimes they can do a better job (at less cost) adjusting for the discrepancies and separation between producers and consumers.
Suitable Middlemen Not
Available
10-4

7. Distribution Channels: Producer-Retailer-Consumer
Example:
Michelin Tires
Sears
Consumer
Producer

8. Distribution Channels: Producer-Agent-Consumer
Example:
American Airlines
International Tours
Travel Agency
Consumer
Producer

9. Distribution Channels: Producer-Wholesaler-Retailer-Consumer
Example:
Moosehead Brewery
All Brands Distributor
Zimmerman’s liquor store
Consumer
Producer

10. Distribution Channels: Producer-Agent-Wholesaler-Retailer-Consumer
Example:
Sports Illustrated Magazine
Hearst (Ntl. wholesaler)
Local wholesaler
Student union bookstore
Consumers

11. Dual Distribution
Using more than one channel of distribution to reach the same or different markets

12. Market Exposure What Market Exposure Fits the Marketing Objectives
This slide relates to the material on pp See also Transparency 78 and Overheads
Intensive
What Market
Exposure
Fits the
Marketing
Objectives
Selective
Summary Overview
Ideal market exposure makes a product available widely enough to satisfy target customers’ needs but not exceed them. Too much exposure increases marketing costs and such inefficiency is detrimental to both the firm and the customers who ultimately pay more for products.
Teaching Tip: Another way to look at ideal market exposure is to try and develop a perfect balance of supply and demand.
Three exposure strategies are typical: intensive, selective, and exclusive distribution.
Market Exposure
Intensive Distribution. This means selling the product through all responsible and suitable wholesalers and retailers who will stock and/or sell the product. This is particularly appropriate for convenience products.
Teaching Tip: You might remind students of how some product classes require much less market exposure than others.
Selective Distribution. This means selling only through those middlemen who will give the product special attention. This is typically associated with shopping products.
Exclusive Distribution. This means selling through only one middleman in a particular geographic area. Exclusive distribution is often used with specialty products.
Exclusive
= number of
outlets
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13. Channel Members May Reduce Discrepancies and Separations
Discrepancy of quantity
Discrepancy of assortment
Regrouping activities
accumulating
Bulk-breaking
Sorting
Assorting

14. Accumulating Bulk Producer A Producer A Producer A Producer A
Intermediary
Buyer

15. Breaking Bulk
Producer
Intermediary
Buyer A
Buyer B
Buyer C
Buyer D

16. Creating Assortments Sends assortment Intermediary of produce in one
order to buyer
Intermediary
Buyer

17. Managing Channel Relationships
This slide relates to the material on pp See Transparency 76 and Overhead 103.
Managing Channel Relationships
Role of Channel Captain
Common Objectives
Conflict Handling
Whole-Channel Product-Market Commitment
Choosing the Type of Relationship
Key
Issues in
Channel
Management
Summary Overview
Channel relationships must be managed. For marketing managers it is important to remember that just as middlemen are specialists in certain areas they are also separate businesses that may not have the same objectives as the marketer of the product. Traditional channel system members make little or no effort to cooperate with one another. A few key areas for managing traditional channel relationships are covered below.
Managing Channel Relationships
Choosing the Type of Relationship. Marketing managers usually have some choice in which type of channel system to join or develop. It is important to choose a type that will handle the needs of the product well.
Whole-Channel Product-Market Commitment. This requires that all members focus on the same target market at the end of the channel and share the various marketing functions in appropriate ways.
Conflict Handling. Specialization can lead to conflicts as the priorities of one functional area may not align well with the priorities of other functional areas. Two types of conflict are possible and must be planned for:
Vertical Conflict. This is conflict between two firms at different levels in the channel of distribution, as between a producer and wholesaler.
Horizontal Conflict. Here conflict occurs between two firms at the same level in the channel of distribution, such as two retailers.
Common Objectives. Traditional channels must share the same common objectives -- satisfying target consumers -- in order to be effective.
Channel Captains. Because traditional channels are independent businesses, one member often operates as a channel captain - a manager who helps direct the activities of a whole channel and tries to avoid or resolve channel conflicts.
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18. Vertical Marketing Systems
This slide relates to the material on pp and corresponds to Exhibit 10-3 on p. 238 and Transparency 77. See also Overhead 104.
Vertical Marketing Systems
Characteristics
Type of channel
Little or
none
Some to good
Fairly good
to good
Complete
None
Economic power and leadership
Contracts
One company ownership
Typical “inde-pendents”
McDonald’s
Florsheim
General Electric
Amount of cooperation
Traditional
Vertical marketing systems
Administered
Contractual
Corporate
Control maintained by
Examples
Summary Overview
Vertical marketing systems are channel systems in which the whole channel focuses on the same target market at the end of the channel. The three types of vertical marketing systems are discussed below.
Vertical Marketing Systems
Corporate Channel Systems. A corporate channel system is characterized by the ownership of each level of the channel by the same corporation. Corporate channel systems often develop by vertical integration -- the buying of other firms by one member of the channel. Any level of the channel may become the acquiring corporation -- producers, wholesalers, or retailers.
Administered. Under this system, channel members informally agree to cooperate with each other. Such agreements typically cover procedures to routinize ordering, standardize accounting, and coordinate promotion efforts.
Discussion Note: Channel leadership and the emergence of a channel captain are often found in administered systems. The leader may have some special expertise or simply have more economic clout.
Contractual. Under this system, channel members formally agree to cooperate in contracts. This setup provides some of the advantages of corporate integration while retaining some of the flexibility of traditional systems.
Exhibit 10-3
10-8