Chapter 15

Channels of Distribution:
Conflict, Cooperation, and
Management
Sommers  Barnes
Ninth Canadian Edition

Presentation by
Karen A. Blotnicky
Mount Saint Vincent University, Halifax, NS

Copyright © 2001 by McGraw-Hill Ryerson Limited

Chapter Goals
To gain an understanding of:
• The nature and importance of intermediaries
• What a distribution channel is and does
• The decisions involved in designing a channel of
distribution
• Major channels used to distribute consumer goods,
business goods, and services
• Vertical marketing systems
• Intensity of distribution
• Choice of intermediaries and conflict management
• Legal considerations and channel arrangements

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The Distribution Function
• distribution is about getting the product or service
to the customer as conveniently as possible; it
deals with access and availability
• intermediaries perform many of the distribution
functions on behalf of suppliers
• merchant intermediaries actually take title to
physical products that they distribute
• agents do not ever own the products, but they
arrange the transfer of title

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Distribution Channels
• The role of distribution entails:
• Arranging for its sale and transfer
of title
• Promoting the product
• Storing the product
• Assuming some risk during
distribution.
• Intermediaries often perform these
activities for producer or consumer.

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 The Distribution Functions
SALES SPECIALIST PURCHASING AGENT
FOR PRODUCERS FOR BUYERS
I
N
• Provides market T • Anticipates wants
information E • Subdivides large
• Interprets consumers’ R quantities of a product
wants M • Stores products
• Promotes producers’ E • Transports products
products • Creates assortments
D
• Creates assortments • Provides financing
• Stores products
I • Makes products
• Negotiates with A readily available
customers R • Guarantees products
• Provides financing Y • Shares risks
• Owns products
• Shares risks

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Designing the Channel
Channel design is a strategic marketing
tool. Four decisions can be help a firm
design a distribution channel:
• what role distribution is to play in achieving
objectives
• what type of channel is needed? with or
without intermediaries?
• what level of intensity of distribution?
• which specific intermediaries to use? which
will be best suited to achieve objectives?

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 The Well-Designed
Distribution
Strategy
Specify
Select Determine
the role of Choose
type of appropriate
distribution specific
distribu- intensity
within the channel
tion of distri-
marketing members
channel bution
mix

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Selecting the Type of
Channel
• some firms will distribute directly; others will use a
number of intermediaries:
• producer consumer (direct)
• producerretailerconsumer
• producerwholesalerretailer consumer
• produceragentretailerconsumer
• produceragentwholesaleretailerconsumer
• when would each of these be considered?

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 Major Distribution
Channels
• For distribution of consumer goods, five different
types of channels are widely used.
• Business goods are normally distributed through four
major types of channels.
• There are only two common channels of distribution
for services.
• Some producers are not content to use only a single
distribution channel and use multiple channels
(a.k.a dual distribution)
distribution
• Multiple channels can aggravate middlemen and
cause conflicts in the channels.

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Consumer Channels
PRODUCERS OF CONSUMER GOODS

Agents Agents

Merchant Merchant
wholesalers wholesalers

Retailers Retailers Retailers Retailers

ULTIMATE CONSUMERS
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Business Channels
PRODUCERS OF BUSINESS GOODS

Agents Agents

Merchant wholesalers Merchant wholesalers

(industrial distributors) (industrial distributors)

BUSINESS USERS
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Service Channels
PRODUCERS OF SERVICES

Agents

ULTIMATE CONSUMERS OR BUSINESS USERS

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Multiple Distribution
Channels
• some firms will use several distribution channels to
reach specific markets or segments
• dual distribution is used, for example, to reach
business and consumer markets, or to carry different
groups of products
• or may be used to reach different segments of the
seller’s market; different sizes of buyers or different
regions of the country
• some companies operate their own stores

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Vertical Marketing
Systems (VMS)
• a tightly coordinated distribution channel
designed to improve operating efficiency and
marketing effectiveness.
• Corporate VMS: One firm owns other firms in channel
or the entire channel-- Goodyear, Roots.
• Contractual VMS: Independents work together for
much greater effectiveness: IGA, IDA.
• Administered VMS: Relies on economic power of one
channel member-- Rolex, Kraft General Foods..

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Intensity of Distribution

INTENSIVE SELECTIVE EXCLUSIVE

Distribution Distribution Distribution
through every through multiple, through a single
reasonable but not all, wholesaling
outlet in a reasonable middleman
market outlets in a and/or retailer
market in a market

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Considerations in
Channel Choice
• Market Considerations: Type of market,
concentration, potential customers, order
size.
• Product Considerations: Consider unit
value, perishability, technical nature of
product.
• Intermediaries Considerations: Services
offered, availability, attitude, dominance.
• Company Considerations: Desire for
channel control, management, money and
services seller can provide to support sales.

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Conflict and Control
in Channels
• Channel conflict exists when channel members
interfere with each others’ objectives.
• Horizontal conflict involves firms on same level--
grocery store vs. drug store.
• Vertical conflict involves firms at different levels
• producer versus wholesaler
• producer versus retailer
• Channel Power is the ability to influence or
determine behaviour of others in channel.
• Based on expertise, rewards and sanctions.

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Producer/Retailer Conflict
Small suppliers’ complaints about
large department stores:
• Onerous logistical demands.
• Pressure to cut prices.
• Demands to give the stores exclusivity.
• Forcing suppliers to contribute
advertising and promotional dollars to
the stores.
• Requiring suppliers to invest in
elaborate computerized inventory
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More Complaints
Small suppliers’ complaints about discounters:
• Being asked to supply their goods on consignment.
• Being asked to deal directly with the retailers’
headquarters and to give to the retailer an amount
equal to the commission that would have gone to
manufacturers’ agents.
Responses from smaller suppliers:
• Quit doing business with big retailers whose
demands are too strict and outlandish.
• Become a retailer.
• Merge with another manufacturer.

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Legal Considerations
• Dealer Selection: Refusing to sell to
some firms. Can be done carefully.
• Exclusive Dealing involves shutting
out competitors, giving most business
to one firm.
• Tying Contracts involves providing one
item on condition other lines be
carried as well.
• Exclusive Territories can create
monopolies.

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Channels for Entering
Foreign Markets
• Exporting, through:
• An export merchant in the manufacturer's
country that buys goods and exports them.
• An export agent located in either the
manufacturer's or the destination country.
• A company’s sales branches.
• Contracting, via:
• Licensing: Right to use production process,
patents, trademarks, or other assets.
• Franchising.
• Contract manufacturing: having a foreign-based
manufacturer produce the product
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More Foreign Market Entry
Channel Options
• Direct investment, including:
• Joint venture or partnership with
a foreign company.
• Strategic alliance.
alliance
• Wholly-owned subsidiaries.

• Multinational corporation, in which

the foreign and domestic operations
are integrated and are not
separately identified.
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The Changing Face
of Distribution
• Internet (“click and mortar” vs.
“brick and mortar”) a major
factor-- where is it heading?
• Direct Response TV sales are
growing in popularity, especially
for time-starved shoppers
• “The world’s largest bookstore” is
on the Internet! (Amazon.com)

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