BY:

NIPUN HANS
EHSAN-UL-HAQ
• Channel organisation- Definition

• Channel functions & flows

• Channel levels

• Channel Organisation Decisions

• Channel Integration & Systems

Channel organisation is a process by which a company creates
formalized programs for selling and servicing customers within a
specific channel to improve effectiveness & efficiency of a channel.

It consist of 3 variables:

 The frequency of interaction among channel members.
 The degree of uncertainty facing each of the members & the channel as
a whole.
 Investment of the channel members.

Channel organisation covers processes for identifying key

customers, communicating with them, and continuing to create
value after the first contact.
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1-LEVEL

2-LEVEL

3-LEVEL

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1-LEVEL

2-LEVEL

3-LEVEL
• Producers should evaluate the number of years
in business, other lines carried, growth & profit
record, cooperativeness & service reputation.
• If the intermediaries are sales agents, producers
should evaluate the number & character of other
lines carried & the size & quality of the sales
force.
• If intermediaries are department stores that
want exclusive distribution, producer should
evaluate locations, future growth potential.
• A company needs to view its intermediaries in
the same way it views it end user. So they should
construct a channel positioning such that its
channel offering is tailored to provide superior
value to its intermediaries.
• The company should plan & implement careful
training programs, market research programs, &
other capability-building programs to improve
intermediaries. For e.g. That in Microsoft.
• A major mechanism used to motivate channel
members is the functional discount system.
• These systems set up payment schedules for
levels of participation in the marketing flows.
• The producer uses a value added principle
that rewards dealers for services.
• This helps producer to improve market
penetration & preserving end-user
satisfaction.
• Producers must periodically evaluate
intermediaries against standards as sales-
quota attainment, average inventory levels,
customer delivery time, treatment of
damaged & lost goods.

• Underperformers need to be counseled,

retrained, motivated, or terminated.
• A producer must periodically review & modify its
channel design & arrangements.
• Producer will want to modify when the
distribution channel is not working as planned,
consumer buying patterns change, the market
expands, new competition arises etc.
• No marketing channel will remain effective over
the whole product life cycle. So, it has to be
modified.
 EXAMPLE: APPLE
• In 2001, Apple opened its retail stores for
better relationship with its customers
• Its network generally comprise isolated &
autonomous units, each of which performs a
traditionally defined set of marketing functions.
• Coordination among channel members is
achieved primarily through bargaining &
negotiation.
• The operating units within such channels are
frequently unable to achieve systematic
economies.
 VMS is a planned channel system in which producer, wholesalers &
retailers act as a unified system.

 One channel member, the channel captain, owns the others or

franchises them or has so much power that they all cooperate.

 Forward integration, a firm attempts to control downstream

distribution.
 Backward integration occurs when a manufacturer attempts
to gain greater control over inputs in its production process.
 A VMS offers several benefits.
 First, it improves chances for controlling and coordinating the
steps in the distribution or production process.
 May also let a manufacturer expand into profitable new
businesses.
• VMSs serve around 80% of the US market.
 It achieves channel coordination when a dominant channel
member exercises its power.
 In such systems, administrative strategies combined with
the exercise of power are relied on to obtain systematic
economies.
 In this system, units can exist with different goals, but a
mechanism exists for informal collaboration on general goal.
 Decision making takes place by virtue of interaction
between channel members in the absence of formal
inclusive structure.
 Successful administered system is one in which effective
interorganisation management has been correctly applied.
 CHARACTERISTICS
1. NATURE OF CONTRACT
2. NATURE OF PERFORMANCE
EVALUATION
3. SUPPLIER PARTICIPANT
4. DISTRIBUTOR PARTICIPANTS
5. DISTRIBUTOR’S GOAL
6. SUPPLIER’S GOAL
CONVENTIONAL
Negotiation on an individual
order basis
Event centered; primarily
related to sales volume & other
short-term performance criteria
Supplier’s territorial salesperson
Buyer
Sales gain & percent markup
Big order on each call
ADMINISTERED
Advanced joint planning for
extended time period
Specific performance criteria
written into the program
Salesperson & major regional or
headquarters executive
Various executives, perhaps top
management
Programmed total profitability
Continuing profitable
relationship
• Kodak, Gillette and Procter & Gamble are able to
command high level of cooperation with the help of
this system.
 Contractual VMS
• Independent firms at different levels of
production & distribution who join through
contracts to get economies or sales impact.

• Franchise agreements are most common type.

 Contractual
Contractual
VMS
VMS

Wholesaler
Wholesaler Sponsored
Sponsored Retailer Franchise
Franchise
Retailer
Voluntary
Voluntary Chain
Chain Cooperatives Organizations
Organizations
Cooperatives

Manufacturer-
Manufacturer- Manufacturer-
Manufacturer- Service-Firm-
Service-Firm-
Sponsored
Sponsored Retailer
Retailer Sponsored
Sponsored Wholesaler
Wholesaler Sponsored
Sponsored Retailer
Retailer
Franchise
Franchise System
System Franchise
Franchise System
System Franchise
Franchise System
System
Wholesaler-sponsored voluntary chains- Wholesalers organize
voluntary chains of independent retailers to help them standardize their
selling practices & achieve buying economies in order to compete with large
chain organizations.

Retailer Cooperatives- Retailers take the initiative & organize a new

business entity to carry wholesaling & possibly some production. Members
plan their advertising jointly.

Franchise Organizations- A channel member called a franchisor might

link several successive stages in production-distribution process. In this
Retailers are independent businessmen & a contract exist that specifies roles.
• VOLUNTARY GROUPS: Canadian Tire

• RETAILERS COOPERATIVE: Topco Associates

Manufacturer-sponsored retailer franchise-
Example: Ford licenses dealers to sell its cars. The dealers are independent
businesspeople who agree to meet specified conditions of sales & services.
Manufacturer-sponsored wholesaler
franchise- Example: Coca-Cola licenses bottlers in various
markets that buy its syrup concentrate & then carbonate, bottle & sell it to
retailers.
Service-firm-sponsored retailer franchise- A
firm organizes a whole system for bringing its service efficiently. Example:
Computer training businesses (NIIT, APTECH).
Leasing- The franchisor leases the land, building & equipment to
franchisees. Leasing is used in conjunction with other provisions.
Licensing- The franchisor licenses the franchisee to use his
trademarks & business techniques. The franchisor either supplies the
product or provide franchisees with a list of approved suppliers.
Co-ownership franchise- The franchisor & franchisee
share the investment & profits. Example: Denny’s Restaurants.
Co-management- The franchisor controls the major part of
the investment. The partner-manager shares profit proportionately.
Example: Travelodge & Holiday Inn in hotel & motel business.
• It is where a single owner runs organizations at each stage of
the marketing channel it operates.

• It is of two types:
– FORWARD INTEGRATION- It occurs when a manufacturer decides to
establish its own sales branches, distribution centers.
– BACKWARD INTEGRATION- It occurs in distribution when
retailers/wholesalers assumes ownership of institutions that normally
precede them in the marketing flow of goods & services.
• FORWARD INTEGRATION: ESPIRIT

• BACKWARD INTEGRATION: American Hospital Supply

Corporation is both a major distributor & manufacturer of health care
products & services.
 Innovations in Marketing Systems

• Multichannel Distribution System

– Occurs when a single firm sets up two or more
marketing channels to reach one or more
customer segments.
– Also called hybrid marketing system.

Copyright 2007, Prentice Hall, Inc. 10-30

Hybrid Marketing Channel
 Horizontal Marketing Systems
• Channel arrangements where two or more
companies at one level join in pursuit of
market opportunities.

• Combine resources & strengths to create

synergies.
 Horizontal Marketing Systems - Examples

• Cereal Partners
– Nestle & General Mills

• Nestea
– Nestle & Coca-Cola
 Changing Channel Organization

• Disintermediation:
– Occurs when product and service producers cut
out intermediaries and go directly to final
buyers, or when radically new types of channel
intermediaries displace traditional ones.

Copyright 2007, Prentice Hall, Inc. 10-34

• It means that the company or site offers to
transact or facilitate the selling of products &
services online.
• Two types of e-companies:
– Pure Click: Those that have launched a Web site without any
previous existence as a firm. Such as search engine, Internet service
providers, commerce sites etc.
– Brick-and-click: They are the existing companies that have added
an online site for information.
• HARLEY DAVIDSON
 Gray Markets
• Unauthorized distributors selling product in
parallel with legitimate distributors
Goals of the Logistics System:

Deliver a targeted level of

customer service at the
least cost.
Physical Distribution Expenditures
Warehousing 22%

Customer Service/Order
Transportation Processing 6%
42%
Administrative Costs 5%

Inventory Control
25%
SOURCE: These 2003 estimates were provided by Dr. Julie Gentry, Logistics Faculty, University of Arkansas-
Fayetteville
 This Concept Recognizes that Providing Better Customer Service
and Trimming Distribution Costs Requires Teamwork,
Teamwork Both
Inside the Company and Among All the Marketing Channel
Organizations.
• No marketing channel is perfect for a
company, it needs to
– Innovate
– Adapt
– Modify
According to the needs of the product & customer
to increase the efficiency of the channel as a
whole.