1. 6 Designing the Marketing Channel

2. What is Channel Design
There are variations in usage of the term ‘design’ of marketing channel:
a noun to describe channel structure
The formation of a new channel from scratch
Modifications to existing channels
‘Selection’

3. What is Channel Design
It refers to those decisions involving the development of new marketing channels where none had existed before, or to modification of existing channels.

4. Channel Design
Key distinguished points associated with channel design:
It is presented as a decision faced by the marketer (same as other marketing mix).
It is used in the broader sense to include either setting up channels from the scratch or modifying existing channels (reengineering).
The management has taken a proactive role in the development of the channel.
The term ‘selection’ refers to only 1 phase of channel design (selection of the actual channel members).
It is a strategic tool for gaining a differential advantage.

5. Who Engages in Channel Design
Producers/ Manufacturers
Wholesalers
Retailers
Market

6. A Paradigm of the Channel Design Decision
The channel design decision can be broken down into 7 phases or steps:
Recognizing the need for a channel design decision
Setting and coordinating distribution objectives
Specifying the distribution tasks
Developing possible alternative channel structures

7. A Paradigm of the Channel Design Decision
The channel design decision can be broken down into 7 phases or steps:
Evaluating the variables affecting channel structures
Choosing the best channel structure
Selecting the channel members (see ch.7)

8. Phase 1: Recognizing the Need for a Channel Design Decision
Many situations can indicate the need for a channel design decision. Among them are the following:
Developing a new product/product line
Aiming an existing product at a new target market (i.e. additional channel from b2b to b2c)
Making a major change in some other component of the marketing mix (i.e. new pricing policy emphasizing lower prices)
Establishing a new firm
Adapting to changing intermediary policies (i.e. if intermediaries begin to emphasize their own private brands, adding new distributors for the manufacturer may be needed.)

9. Phase 1: Recognizing the Need for a Channel Design Decision
Many situations can indicate the need for a channel design decision. Among them are the following:
Dealing with changes in availability of particular kinds of intermediaries (i.e. reducing number of prestigious department stores in the U.S. affected French manufacturers of luxury goods)
Opening up new geographic marketing areas (territories)
Facing the occurrence of major environmental changes
Meeting the challenge of conflict or other behavioral problems (i.e. A loss of power by a manufacturer to his/her distributors or communication difficulties)
Reviewing and evaluating undertaking by a firm may point to the need for changes in existing channels/ need for new channels

10. Phase 2: Setting and Coordinating Distributing Objectives
In order to set distribution objectives that are well coordinated with other marketing and firm objectives and strategies, the channel manager needs to perform 3 tasks:
Become familiar with the objectives and strategies in the other marketing mix areas
Set distribution objectives and state them explicitly
Check to see if the distribution objectives set are congruent with marketing and other general objectives and strategies of the firm

11. Phase 2: Setting and Coordinating Distributing Objectives
Becoming familiar with the objectives and strategies in the other marketing mix areas
Short shelf life
Strategic emphasis on the “Freshness”
Uses almost 13,000 drivers/salespeople to deliver products directly to grocery stores
Longer shelf life

12. Phase 2: Setting and Coordinating Distributing Objectives
Set distribution objectives and state them explicitly
Example:
IBM originally was to “have retailers displaying PCs within driving distance of anyone in the U.S. who wanted to buy one”.
Later, when IBM decided to use mail order channels, its distributor objective was broadened to “make its PCs directly available wherever its customers are”

13. Phase 2: Setting and Coordinating Distributing Objectives
Check to see if the distribution objectives set are congruent with marketing and other general objectives and strategies of the firm
Firm’s overall objectives and strategies
*Interrelationships and Hierarchy of Objectives and Policies in the Firm
General marketing objectives and strategies
Product objectives and strategies
Pricing
objectives and strategies
Promotion
objectives and strategies
Distribution
objectives and strategies

14. Phase 3: Specifying the Distribution Tasks (Functions)
The kinds of tasks required to meet specific distribution objectives must be precisely stated and situationally dependent on the firm.
Example:
A manufacturer of high-quality tennis racquets aimed at serious amateur tennis players would need to specify distribution tasks as the following:

15. Phase 3: Specifying the Distribution Tasks (Functions)
Example:
Gather info. on target market shopping patterns
Promote product availability in the target market
Maintain inventory storage to assure timely availability
Compile info. about product features
Provide for hands-on tryout of product
Sell against competitive products

16. Phase 3: Specifying the Distribution Tasks (Functions)
Example:
Process and fill specific customer orders
Transport the product
Arrange for credit provisions
Provide product warranty service
Provide repair and restringing service
Establish product return procedure

17. Phase 4: Developing Possible Alternative Channel Structures
1. Number of
levels in the channel
2. Intensity at the
various levels
Allocation Alternatives
3. Types of
intermediaries
at each level

18. Phase 4: Developing Possible Alternative Channel Structures
Number of Levels
Range from two to five or more
Number of alternatives is limited to two or three choices
Limitations result from the following factors:
Particular industry practices
Nature & size of the market
Availability of intermediaries

19. Phase 4: Developing Possible Alternative Channel Structures
Intensity at the Various Levels
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

20. Phase 4: Developing Possible Alternative Channel Structures
Types of Intermediaries
Numerous types
Manager’s emphasis on types of distribution tasks performed by these intermediaries
Should not overlook new emerged intermediary types:
Electronic online auction firms (eBay)
Industrial products sold in B2B markets
(Chemdex, Converge.com)

21. Phase 5: Evaluating the Variables Affecting Channel Structure
Categories of Variables
Market Variables
Product Variables
Company Variables
Intermediary Variables
Environmental Variables
Behavioral Variables

22. Phase 5: Evaluating the Variables Affecting Channel Structure
Market Variables
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

23. Phase 5: Evaluating the Variables Affecting Channel Structure
Product Variables
Bulk & Weight -> heavy & bulky product -> high handling & shipping costs -> minimize costs by shipping in large lots to fewest possible points
Perishability (fresh products) -> channel structure should be designed to provide for rapid delivery from producers to consumers
Unit Value -> lower unit value product (convenience goods) -> create small margin for distribution costs -> should use the longer channel
Degree of Standardization -> can lengthen the channel by increase intermediaries unlike the custom-made products (i.e. industrial machinery) often sold directly from manufacturer to the user
Technical versus Nontechnical –> highly technical product -> needed the technical advice, after sales service from the expert -> generally be distributed through a direct channel
Newness -> new product -> require extensive & aggressive promotion in the introduction stage -> a shorter channel will enable such promotional effort

24. Phase 5: Evaluating the Variables Affecting Channel Structure
Company Variables
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

25. Phase 5: Evaluating the Variables Affecting Channel Structure
Intermediary Variables
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.

26. Phase 5: Evaluating the Variables Affecting Channel Structure
Environmental Variables
Economic
Competitive
Sociocultural
The impact of environmental forces is
a common reason for making
channel design decisions.
Technological
Legal

27. Phase 5: Evaluating the Variables Affecting Channel Structure
Behavioral Variables
Develop congruent roles for channel members.
Be aware of available power bases.
Attend to the influence of behavioral problems that can distort communications.

28. Phase 6: Choosing the “Best” Channel Structure
Heuristics in Channel Design
Benefit
Fairly simple prescriptions for channel structure
Limitation
Mostly useful as rough guide to decision making

29. Phase 6: Choosing the “Best” Channel Structure
Approaches for Choosing Channel Structure
“Characteristics of Goods & Parallel Systems” Approach
Financial Approach
Transaction Cost Analysis Approach
Management Science Approaches
Judgmental-Heuristic Approach

30. Phase 6: Choosing the “Best” Channel Structure
Judgmental-Heuristic Approach 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