Channels of Distribution

Channels of Channels of DistributionDistribution

Chapter TwelveChapter Twelve

Copyright ©2011 Pearson Education, Inc., Publishing as Prentice Hall 12-2

Key Learning PointsKey Learning Points

The functions of channels of distributionThe functions of channels of distributionKey factors affecting the choice among Key factors affecting the choice among alternative channel structuresalternative channel structuresChannel optionsChannel optionsManaging channels of distribution and Managing channels of distribution and resolving channel member conflictresolving channel member conflictSpecial topics in channels of distributionSpecial topics in channels of distributionChannel decisions in high-tech and Channel decisions in high-tech and global contextsglobal contexts


- Russell S. Winer

““Customers must have access Customers must have access to your product or service to be to your product or service to be able to purchase it. The purpose able to purchase it. The purpose of a system of distribution of a system of distribution channels is to provide an channels is to provide an efficient means of getting your efficient means of getting your products to customers and products to customers and customers to your products.customers to your products.””


Importance of Channels of Importance of Channels of DistributionDistribution

Channels imply Channels imply physical physical distribution, also distribution, also called logistics.called logistics.

Distribution Distribution applies to applies to services as well services as well as products.as products.


Figure 12.1Figure 12.1The Value-Added Chain of The Value-Added Chain of

Distribution ChannelsDistribution Channels


IllustrationIllustration

Purchased in 1993 for $1.7 billion Purchased in 1993 for $1.7 billion by Quaker Oats, Snapple was by Quaker Oats, Snapple was sold in 1997 to Triarc Beverages sold in 1997 to Triarc Beverages for $300 million.for $300 million.

In 2000, Triarc sold Snapple for In 2000, Triarc sold Snapple for $1 billion to Cadbury Schweppes.$1 billion to Cadbury Schweppes.

Distribution issues are at the Distribution issues are at the heart of Snapple’s widely heart of Snapple’s widely fluctuating value.fluctuating value.


Importance of Channels of Importance of Channels of DistributionDistribution

Major Types of Marketing IntermediariesMajor Types of Marketing Intermediaries

MiddlemanMiddlemanMerchant Merchant middlemanmiddlemanAgentAgentWholesalerWholesalerRetailerRetailer

BrokerBrokerManufacturers’ Manufacturers’ agentagentDistributorDistributorJobberJobberFacilitating agentFacilitating agent


Figure 12.2, Part AFigure 12.2, Part AAlternate Channel System for Alternate Channel System for

Consumer ProductsConsumer Products


Figure 12.2, Part BFigure 12.2, Part BAlternate Channel System for Alternate Channel System for

Industrial ProductsIndustrial Products


Figure 12.3Figure 12.3Channel System for a Channel System for a

Manufacturer of Food Service Manufacturer of Food Service DisposablesDisposables


Channel DynamicsChannel Dynamics

Channel Channel structures must structures must adapt to adapt to changes in the changes in the environment.environment.

Structural Structural changes can changes can impact the impact the entire industry.entire industry.


Functions and Services Functions and Services Performed by Channel Performed by Channel

MembersMembersMarketing researchMarketing research

CommunicationsCommunications

ContactContact

Matching/customizingMatching/customizing

NegotiationNegotiation

Physical distributionPhysical distribution

FinancingFinancing

Risk takingRisk taking

ServiceService

Relationship Relationship managementmanagement

Product assemblyProduct assembly

Channel FunctionsChannel Functions


Table 12.2Table 12.2Channel Function AnalysisChannel Function Analysis


Table 12.3Table 12.3Customer Wants and Needs Customer Wants and Needs

Driving the Saturn Distribution Driving the Saturn Distribution SystemSystem


Customer behaviorCustomer behavior

CompetitorsCompetitors

Marketing strategyMarketing strategy

ResourcesResources

Changes in technologyChanges in technology

Factors Affecting the Factors Affecting the Channel SystemChannel System


Channel OptionsChannel Options

Direct and indirect channelsDirect and indirect channelsDirect channelsDirect channels

Indirect channelsIndirect channels

Strengths and weaknessesStrengths and weaknesses

Channel option considerationsChannel option considerations


Instances When Instances When Direct Channels Are Direct Channels Are

PreferablePreferableInformation needs are high.Information needs are high.

Customization is important.Customization is important.

Quality assurance matters.Quality assurance matters.

Purchase orders are large.Purchase orders are large.

Transportation and storage Transportation and storage are complex.are complex.



Instances When Instances When Indirect Channels Are Indirect Channels Are

PreferablePreferableOne-stop shopping for One-stop shopping for many products is many products is important.important.

Availability is important.Availability is important.

After-sales service is After-sales service is important.important.



Factors Influencing Choice of Factors Influencing Choice of Direct or Indirect ChannelsDirect or Indirect Channels

ProfitabilityProfitability

Level of Level of intermediary intermediary commitmentcommitment

Customer loyaltyCustomer loyalty

Likelihood that Likelihood that the channel the channel member member will compete with will compete with your productyour product

DisintermediationDisintermediation



Discussion Discussion

Disintermediation is becoming Disintermediation is becoming more common in many industries. more common in many industries.

Name some examples of products Name some examples of products or services that are now selling or services that are now selling directly to consumers and directly to consumers and bypassing traditional channel bypassing traditional channel members such as retailers.members such as retailers.


Figure 12.4Figure 12.4Multiple ChannelsMultiple Channels


Figure 12.4Figure 12.4Ingersoll-Rand Web PageIngersoll-Rand Web Page


Figure 12.6Figure 12.6Hybrid Channel DesignHybrid Channel Design


Figure 12.7Figure 12.7Hybrid Channel DesignHybrid Channel Design


IllustrationIllustration

J.C. Penny’s innovative J.C. Penny’s innovative “Know Before You Go” service lets customers service lets customers check inventory levels check inventory levels of a retail store within a of a retail store within a zip code on the web zip code on the web prior to going to the prior to going to the store. The “store. The “Dorm Life” ” service targets parents service targets parents of college students in a of college students in a similar fashion. similar fashion.


Factors Influencing Channel Factors Influencing Channel Member PowerMember Power

Sales volume of Sales volume of channel channel membermember

Product Product differentiateddifferentiated

Channel Channel switching costsswitching costs

Channel may Channel may integrate backwards integrate backwards or become a or become a competitorcompetitor

Quality of channel Quality of channel information about information about market conditionsmarket conditions

Channel Power and Channel Power and ManagementManagement



Channel power:Channel power:Mega-retailers and category Mega-retailers and category killers:killers:

Use information-intensive Use information-intensive operations operations Cut out intermediariesCut out intermediaries

Channel power can lead to Channel power can lead to hardball tactics.hardball tactics.


Figure 12.9Figure 12.9Levels of Conflict between Levels of Conflict between Manufacturers & Channel Manufacturers & Channel

MembersMembers



Sources of channel Sources of channel conflict:conflict:

Goal divergenceGoal divergenceDomain dissensusDomain dissensusDiffering Differing perceptions perceptions of realityof realityMisuse of powerMisuse of power


Conflict resolution methods:Conflict resolution methods:Demarcating product linesDemarcating product lines

Jointly developing solutionsJointly developing solutions

Increasing push and pull activitiesIncreasing push and pull activities

Developing financial arrangementsDeveloping financial arrangements

Charging higher prices in the direct Charging higher prices in the direct channelchannel

Using channel powerUsing channel power



Use of Channel Power in Use of Channel Power in Conflict ResolutionConflict Resolution

ThreatsThreats

Promises Promises

Legalistic Legalistic pleaspleas

RequestsRequests

RecommendatioRecommendationsns

Information Information exchangeexchange



Table 12.4Table 12.4OEM vs. Branded MarketingOEM vs. Branded Marketing


Channel Issues in Channel Issues in High-Tech MarketingHigh-Tech Marketing

High-tech marketing:High-tech marketing:Original equipment Original equipment manufacturersmanufacturers

Value-added resellers (VARs)Value-added resellers (VARs)

Differences between OEMs and Differences between OEMs and VARsVARs


Global Channel IssuesGlobal Channel Issues

Cultural, economic, and Cultural, economic, and regulatory issues impact global regulatory issues impact global channels.channels.

Western EuropeWestern Europe

Russia and former Soviet Bloc Russia and former Soviet Bloc countriescountries

JapanJapan

China and other Asian marketsChina and other Asian markets


- Russell S. Winer

““The The gray marketgray market is where is where trademarked goods are sold trademarked goods are sold through channels of distribution through channels of distribution that are not authorized by the that are not authorized by the holder of the trademark. It is holder of the trademark. It is common that gray markets common that gray markets develop across country lines. develop across country lines. This phenomenon is often This phenomenon is often called called parallel importingparallel importing..””


Discussion QuestionsDiscussion Questions

1.1. What are the repercussions of counterfeit What are the repercussions of counterfeit branding to customers, channel members, branding to customers, channel members, and the legitimate brand manufacturer?and the legitimate brand manufacturer?

2.2. Are people who purchase counterfeit brands Are people who purchase counterfeit brands realistically members of the true brandrealistically members of the true brand’’s s target market? Why or why not? target market? Why or why not?

Counterfeit products are not the same as gray Counterfeit products are not the same as gray market goods. Counterfeit products are low-quality market goods. Counterfeit products are low-quality trademark infringing trademark infringing ““knock-offknock-off”” versions of versions of branded products created by firms other than the branded products created by firms other than the brand manufacturer (typically in foreign markets).brand manufacturer (typically in foreign markets).


Special Topics in Special Topics in Channels of DistributionChannels of Distribution

Supermarket Supermarket issuesissues

Retailers have Retailers have gained power.gained power.Category Category management is management is important.important.


““The need to be efficient has The need to be efficient has driven category management driven category management and created two concepts and created two concepts initially introduced in the United initially introduced in the United States in the early 1990’s: States in the early 1990’s: efficient consumer response efficient consumer response (ECR) and continuous (ECR) and continuous replenishment program (CRP).”replenishment program (CRP).”

- Russell S. Winer


Special Topics Special Topics

Strategies for intermediariesStrategies for intermediariesDisintermediation threatens Disintermediation threatens intermediaries.intermediaries.

Many intermediaries continue to Many intermediaries continue to survive and even thrive.survive and even thrive.


Executive SummaryExecutive Summary

The distribution system is part of The distribution system is part of the value chain.the value chain.Many channel structures exist.Many channel structures exist.Channel structure is determined by Channel structure is determined by many factors.many factors.Channel members perform many Channel members perform many functions.functions.A common decision sequence is A common decision sequence is followed.followed.


Executive SummaryExecutive Summary

Hybrid channel systems have Hybrid channel systems have different channel types.different channel types.

Channel power is important.Channel power is important.

Channel management involves two Channel management involves two key factors.key factors.

Conflict can be resolved in multiple Conflict can be resolved in multiple ways.ways.

New channel opportunities are New channel opportunities are arising.arising.


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Business

Channels of Distribution