1.

Should advertising agencies and financial institutions be considered channel

members? Why? Why not? Is it more useful, from a managerial perspective,
to think of consumers as members of the channel or as elements of the task
environment of the channel? Can consumers be ‘manipulated’ and/or
incorporated by channel management?

2. A retailer forms long-term supply relationships with several of its key

manufacturers who supply it with product to sell in its stores. Part of the
long-term agreement involves setting prices annually instead of on a
transaction-by-transaction basis. Has a supply-side gap been closed here?
What flow or flows have been involved in this change? Are there instances
where this can increase (rather than decrease) the cost of running the
channel?
 Chapter 5 – Channel Behavior
I. The Supply Chain – It is important to understand the retailer’s role in the larger supply
chain.
A. A supply chain, which is often used interchangeably with the term channel, is a set of
institutions that moves goods from the point of production to the point of consumption.
B. The supply chain, or channel, is affected by five external forces:
1. Consumer behavior,
2. Competitor behavior,
3. The socioeconomic environment,
4. The technological environment, and
5. The legal and ethical environment.
These external forces cannot be completely controlled by the retailer or any other institution
in the supply chain, but they need to be taken into account when retailers make decisions.
C. Eight marketing functions must be performed by a supply chain or channel:
1. Buying,
2. Selling,
3. Storing,
4. Transporting,
5. Sorting,
6. Financing,
7. Information gathering, and
8. Risk taking.
- Whether the economic system is capitalistic, socialistic, or communistic, these eight
marketing functions will exist.
- These functions cannot be eliminated. They can, however, be shifted or divided among the
different institutions and the consumer in the supply chain.
- No member of the supply chain would want, or be able, to perform all eight marketing
functions. Thus, the retailer must view itself as being dependent on others in the supply
chain.
D. Marketing Institutions
1. Primary marketing institutions are supply chain members that take title to the goods. These
include manufacturers, wholesalers, and retailers.
2. Facilitating marketing institutions are those that do not actually take title but assist in the
marketing process by specializing in the performance of certain functions. These include
agents/brokers, financial institutions, market researchers, transporters, advertising agencies,
warehouses, and insurers.
II. Types of Supply Chains- There are three strategy decisions to be made when designing an
efficient and competitive supply chain: supply chain length, width, and control.
A. Supply Chain Length refers to the number of institutions between the manufacturer and
consumer.
1. Supply chains can be direct or indirect.
a. A direct supply chain occurs when manufacturer sell their goods directly to the final
consumer or end user.
b. An indirect supply chain occurs once independent channel members (wholesalers and
retailers) are added between the manufacturer and the consumer.
2. The desired supply chain length is determined by many customer-based factors, such as the
size of the customer base, geographical dispersion, behavior patterns, and the particular needs
of customers.
B. Supply Chain Width - pertains to the number of retailers used to cover a given trading
area.
1. Intensive distribution means that all possible retailers are used in a trade area.
2. Selective distribution means that a moderate number of retailers are used in a trade area.
3. Exclusive distribution means only one retailer is used to cover a trading area.
C. Control of the Supply Chain- A pressing issue for all supply chains is "who should control
the supply chain." In seeking to control or manage a supply chain, there are two basic supply
chain patterns: the conventional marketing channel and the vertical marketing system.
1. A Conventional Marketing Channel is one in which each member of the channel is loosely
aligned with the others and takes a short-term orientation.
2. Vertical Marketing Channels are capital intensive networks of several levels that are
professionally managed and centrally programmed systems to realize the technological,
managerial, and promotional economies of long-term relationships.
a. The basic premise of working as a system is to operate as close as possible to that elusive
100 percent efficiency level.
b. Since vertical channel members now realize that it is impossible to offer consumers
"value" without being a low-cost, high efficiency supply chain, they have developed either
quick response (QR) systems or ECR (Efficient Consumer Response) Systems and make use
of category management techniques.
c. There are three types of vertical marketing channels:
(1) Corporate vertical marketing channels typically consist of either a manufacturer that has
integrated vertically forward to reach the customer, or a retailer that has integrated vertically
backward to create a self-supply network.
(2) Contractual vertical marketing channels are supply chains that use a contract to govern
the working relationship between the members. They include the following types:
(a) Wholesaler sponsored voluntary groups are created when a wholesaler brings together a
group of independently owned retailers and offers them a coordinated merchandising and
buying program that will provide these smaller retailers with economies similar to those
obtained by their chain store rivals.
(b) Retailer owned cooperatives are wholesale operations organized and owned by retailers
and are most common in hardware retailing.
(c) Franchising is a form of licensing by which the owner of a trademark, service mark, trade
name, advertising symbol or method obtains distribution through affiliated dealers.
(3) Administered vertical marketing channels are similar to conventional marketing channels,
but one of the members takes the initiative to lead the channel by applying the principles of
effective interorganizational management, which is the management of relationships between
the various organizations in the supply chain.
III. Managing Retailer-Supplier Relations If retailers want to improve their performance in
these channels, they must understand the principal concepts of interorganizational
management. .
A. Dependency – None of the respective institutions can isolate itself; each depends on others
to do an effective job.
B. Power is the ability of one member to influence the decisions of the other channel
members.
1. There are six types of power:
a. Reward power is based on the ability of A to provide rewards for B.
b. Expertise power is based on B's perception that A has some special knowledge.
c. Referent power is based on the identification of B with A. B wants to be associated or
identified with A.
d. Coercive power is based on B's belief that A has the capacity to punish or harm B if B
doesn't do what A wants.
e. Legitimate power is based on A's right to influence B, or B's belief that B should accept
A's influence.
f. Informational power is based on A’s ability to provide B with factual data.
2. Retailers and suppliers that use reward, expertise, referent and informational power can
foster a healthy working relationship.
3. Coercive and legitimate power tend to elicit conflict and destroy cooperation in the
channel.
C. Conflict – It is inevitable in every channel relationship because retailers and suppliers are
interdependent; that is, every channel member is dependent on every other member to
perform some specific task. There are three major sources of conflict between retailers and
their suppliers:
1. Perceptual incongruity occurs when the retailer and supplier have different perceptions of
reality.
2. Goal incompatibility occurs when achieving the goals of either the supplier or the retailer
would hamper the performance of the other.
3. Domain disagreements occur when there is disagreement about which member of the
marketing channel should make decisions. Examples include:
a. A diverter is an unauthorized member of a channel who buys and sells excess merchandise
to and from authorized channel members.
b. Gray marketing is when branded merchandise flows through unauthorized channels.
c. Free-riding is when a consumer seeks product information, usage instructions, and
sometimes even warranty work from a full-service store but then, armed with the brand’s
model number, purchases the product from a limited service discounter or over the Internet.
IV. Collaboration in the Channel – Although all channels experience some degree of conflict,
the dominant behavior in successful channels is collaboration.
A. However, the management of collaborative relations is facilitated by three
important types of behaviors and attitudes. These are:
1. Mutual trust, which occurs when both the retailer and its supplier have faith that each will
be truthful and fair in their dealings with the other.
2. Two-way communication, which occurs when both the retailer and the supplier openly
communicate their ideas, concerns, and plans.
3. Solidarity exists when a high value is placed on the relationship between a supplier and
retailer.
B. Category management – involves the simultaneous management of price, shelf space,
merchandising strategy, promotional efforts, and other elements of the retail mix within the
category based on the firm’s goals, the changing environment, and consumer behavior.
1. Retailers designate a category manager from among their employees for each category sold
in their store. The retailer defines specific business goals for each category. Subsequently, the
category manager leverages detailed knowledge of the consumer and consumer trends,
detailed POS information, and specific analysis provided by each supplier to the category.
2. In some cases a supplier may serve as the retailer’s category manager. Termed category
captains and/or category advisors, these suppliers work closely with the retail buyer ensuring
that the retailer has the best assortment and the greatest possible sales.

ADVERTIZING

It has long been acknowledged that adverti agenciesoften play a significant rolein assisting
manufacturers, wholesalers and retailers in planning and implementing marketing strategies.
Most firms employ independent agencies to help generate innovative promotional ideas and
themes. In order to offer knowledgable supportsuccessful advertizing agencies maintain
highly qualified and well informed research staff. Many such advertizing and communication
professionals are acknowledged experts in specific industries. To support their programs and
expand overall understanding of business requirements, successful agencies also undertake
active marketing research efforts.

Adv agencies providetechnical assistance to channel members in the establishment of

budgets, media selection, promotional themes and content, and timing of campaigns. To be
fully effective members of a channel must coordinate promotional strategies. It serves as the
catalyst for country wide promotional activities

FINANCIAL\

The provision of adequate and effectively priced financial support is crucial to most business
endeavors. A significant aspect of financing is to provide capital for the inventories and
accounts receivables that are required at each level within the distribution channel. A wide
range of financial institutions such as commercial banks, brokerage houses, savings and
loans, insurance companies, investment bankers and finance companies, are available to
provide primary channel members sophisticated advice and essential operating capital.
Because most firms use debt to finance fixed assets, they require credit lines tofacilitate
operations. To the extent that a firm depends upon credit to facilitate operations, its
relationship wid financial institutions is extremely important.

Traditionally the role of financing institutions has not been readily apparent to the marketing
channel structure, several have recently become very active as a result of their involvement in
acquisitions and takeovers. The result is that some financial firms have becom vry active
managerially in the firms they hav required.

Public corporations can generate cash from stock sales, retained earnings and debt.private
firms must rely upon equity, earning and debt for cash generation. Because of a critical need
to fund expansion, research and development, capital improvements and new business
oppurtunities, the support provided by specialized financial institutions is essential to channel
members. Few firms can sustain operations widout the existence of external financial
partners.