CHANNEL MANAGEMENT AND CHANNEL RELATIONSHIPS

Channel Management & Relationships

Designing a Distribution Channel. Types of Intermediaries Functions of Intermediaries Identification & Selection of Channel Partners. Appointment & Training of Channel Partners. Evaluating & Motivating Channel Partners. Causes of Channel Conflict. Resolution of Channel Conflict.

Designing a Distribution Channel

Specifying the role of distribution channel. Selecting type of distribution channel. Determining the intensity of distribution channel. Choosing specific channel members.

Specifying the role of distribution channel

Channel strategy to be proportional to a Co.s marketing objectives, and roles assigned to the rest of the marketing mix. Co to decide whether distribution will be used defensively or offensively. Defensive approach Distribution as good as a competitor. Offensive approach Gain competitive advantage by having better distribution.

Planning the distribution Channel To decide on:

 Channel structure  Channel tiers

Channel Structure
Direct, Indirect. Vertical, Horizontal. Multi-channel

Channel Structure
Direct: Producer Consumer Indirect: Producer Intermediary Consumer Vertical Marketing Systems (VMS) - Corporate VMS : A firm at one level of channel owns firm at the next or subsequent levels. High degree of control for Producer. - Administered VMS : Dominant brand owners are able to secure strong trade support from intermediaries. - Contractual VMS : Producer exercises control through contractual terms exclusive dealers.

Channel Structure
Horizontal Marketing Systems (HMS) 2 or more unrelated Cos. join together, so as to have pooled resources to exploit an emerging marketing opportunity. This system takes place when a Co. lacks financial resources or marketing know how and is afraid to take risks on its own. Multi-channel Marketing Systems (MMS) MMS occurs when a Co. uses different channels to reach same/different market segments, to ensure availability of right product at right time.

Selecting type of Channel

Decision based on:
 Market considerations.  Product considerations.  Company considerations.  Middlemen considerations.

Factors affecting choice of distribution channels

 Market considerations: Type of market Different distribution channels are used to reach different types of markets. No. of potential customers - No. of customers low, direct distribution possible Geographic concentration of the market Direct distribution practical when there is high concentration of customers in few geographical areas. High market concentration Direct distribution channel : low cost of serving market. Low market concentration Indirect distribution channel : high cost of reaching directly.

Factors affecting choice of distribution channels

 Market considerations:
Customer service level: 3 sub-factors delivery time, lot size, product availability. More the need for customer service : lower deliver time, lower lot size, lower product availability Indirect distribution channel more desirable. Direct distribution economical when either size or total volume of business is large.

Factors affecting choice of distribution channels

 Product considerations:
Unit value Direct distribution possible when unit value is high. Perishability Low shelf life products have to be sold through short distribution channels. Technical nature of product Highly technical products require direct distribution.

Factors affecting choice of distribution channels

 Company considerations:
Desire for channel control Producers wanting more control over their products distribution establish direct distribution. Ability of Management Marketing experience and ability influences channel decisions . Inexperienced Companies would appoint Marketing Agent.

Factors affecting choice of distribution channels

 Company considerations:
Financial resources Financially strong Co. would go in for direct distribution. Financially weak Co.s appoint middlemen. Availability of Working Capital: High Direct distribution channel. Low Indirect distribution channel. Services provided by seller Highly promoted products would have wider retail coverage.

Factors affecting choice of distribution channels

 Middlemen considerations:
Services provided by middlemen Middlemen must provide the service which the producers are unable to provide. Availability of desired middlemen - The middlemen desired by a Producer may not be available, so alternate channels would have to be considered. Attitude of middlemen towards Producers policies If middlemen are unwilling to join a producers channel because of disagreement on policies, then the producer has fewer options.

Selecting type of Channel

 Tiers of distribution channel:
Zero Tier: Producer Consumer. One Tier: Producer Retailer Consumer. 2 Tier: Producer Distributor Retailer Consumer. 3 Tier: Prod Super Dist/Con.Agt Distr Ret Cons. 4 Tier: Prod Mktg Agt S.D/C.A Dist Ret Cons.

Selecting type of Channel

 Tiers of distribution channel:
More widely dispersed the customers Greater the tiers. Zero tier & 1 tier Specialised products, technologically advanced products, industrial products, consumer durables, branded garments. 2 Tier Consumer durables, branded FMCG. 3 & 4 tier Smaller/unbranded FMCG.

Intensity of Distribution
Intensive Distribution through every reasonable outlet in the market. Selective - Distribution through multiple, but not all outlets. Lies midway between extensive and exclusive distribution. Exclusive Distribution through a single outlet in the market.

Types of Intermediaries
Marketing Agent. C&F Agent/Consignee Agent/ Super Distributor. Distributor/Stockist. Wholesaler/Semi-wholesaler. Retailer General Merchant, Chemists & Druggist, Grocer, Dept. Store, Exclusive Outlet, Cooperative Stores, Food Products Store, Pan Bidi Shop.

Functions of intermediaries
Physical possession function: Hold and distribute stocks. Retail function: Buy in large quantities and sell in small quantities. Cover local market in absence of Producers salesmen. Supply retail orders booked by Co. salesman. Promotion function: Help in carrying out local promotion activities. Information function: Provide feedback information on Producers and competitive products and activities. Financing function: Could buy on advance or COD terms from Producers and sell on credit to retailers.

Functions of Intermediaries
 Marketing Agent
Provides full function sales and local promotion support to Producer. Stocks received could be purchased or on stock transfer basis. If stocks purchased, then income is on basis of commission on sales, otherwise could be on cost plus basis. Producer does not employ own sales force.

 C & F Agent
Acts on behalf of the Producer. Holds Producers stock. Basically provides warehousing and stock delivery facility in state where he is based. Distributes stock to market level distributors. Receives income on cost plus basis Is appointed to avoid payment of L.S.T. Producer deploys own sales force.

Functions of Intermediaries
 Consignee Agent/ Super Distributor
Functionally both are same. Super Distributor buys stock on C Form by paying full CST. Consignee Agent buys stock on F Form. Both hold stocks bought from Producer and distribute it to area level distributors Income from commission on sales.

 Distributors/Stockists
Purchases stock from CA/SD/C&FA or directly from Co. In turn distributes stocks to area level retailers. Income from commission on sales.

Identification of Channel Partners

 Prospecting for Agents/Distributors
Advertisements Newspapers/T.V/Cable. Word of mouth publicity through retail trade References from retail trade. References from sales staff of other Companies. References from friends and acquaintances. Reference from tertiary sources Banks, Suppliers, etc.

Selection of Channel Partners

 Criteria of selection for Agents/Distributors
Management strength Financial standing:
 Whether overtrading.  Terms of business with other Cos.  Terms of business with retail trade

Infrastructure:
 Office set up: location, space, computers, telephone/fax, etc.  Godown: Space, location, security, etc.  Delivery vehicles: mechanised 3,4 wheelers, manual.

No. of years in business, Reputation/goodwill.

Selection of Channel Partners

 Criteria of selection for Agents/Distributors
Manpower
 Office staff, numbers and expertise.  Salesmen, number and expertise.

Market coverage and relations. Other businesses, turnover. Reputation of other Agencies handled. Willingness to work.

Appointment of Intermediaries
Prospective appointees contacted by Co. salesman who does initial appraisal and also discusses Co. terms and conditions. Fills up Appraisal Form. If initial appraisal is positive, and prospective appointee also agrees with terms, then a second appraisal is carried out by a superior officer. Both sides agreeing, an Appointment letter is then issued by the Co.

Training of Intermediaries
Channel members have to be trained at the start and also from time to time regarding:
 Company policies and products.  Latest marketing strategies adopted by Co. and also competitors.  Changes in the environment.

Training of Intermediaries
Training Methods
If just one or two distributors are being appointed at the time, then the training is provided by senior Company personnel at the place of business. If more are being appointed at the same time, then a separate training session is organised by the Company.

Training of Intermediaries
 Training sessions:
Provide a platform to the parties involved to communicate and understand each others point of view. A forum where a manufacturer can understand the needs of the dealers and gather information about the market. Makes the intermediary feel valued. Combined with a holiday package are used as reward motivators by the Cos.

Evaluating Channel Members

Evaluation is an on-going exercise. Constant evaluation and fine tuning required to keep abreast of changes in market place, nature of competition, etc. Producers should also evaluate coherence between product and channels, as requirements may change over period of time.

Evaluating Channel Members

 Evaluation Criteria:
Achievement of targeted sales and growth generated. Adherence to payment norms. Maintenance of average inventory levels. Treatment of damaged and returned goods Co-operation in promotional and training programmes.

Evaluating Channel Members

 Channel member relationship life cycle:
Birth Exciting stage. Members work together getting to know each other, but if things are not working out, they should get out immediately. Growth Dictates hard work for both parties. Energy should be directed towards solving problems. Maturity Watch for trouble, as the only way to go is down. Parties required to communicate as it is the key to efficiency. Death Too many problems kill efficiency. So get out fast.

Motivating Channel Members

Motivation is a continuous activity. A Producer has to exert power to motivate the members to take into consideration a macro perspective and work together. Power is the ability of Producer or a channel member to get another channel member to do what otherwise they would not have done.

Motivating Channel Members

Power is an essential ingredient required to motivate and direct efforts of non-identical organisations and individuals. A Producer uses power to elicit cooperation: coercive, reward. legitimate, expert and referent. However, ultimate motivator is the creation of an atmosphere of mutual trust that understands the mutual goals of network partnerships.

Motivating Channel Members

2 types of motivation: Monetary Reward motivator (positive reinforcement). Non-monetary
    Coercion (negative reinforcement). Expert knowledge. Identification basis Legitimate power motivator

Motivating Channel Members

 Monetary motivators:
Reward motivator Based on channel members belief that the other party has an ability to give something of value to him. This reward will be available to him only if he adheres to the wishes of the other party. Known as positive reinforcement as reward is used to motivate the individual to repeat the behaviour.

Motivating Channel Members

 Reward motivators:
Granting larger margins. Higher promotional activities/allowances. Functional discount schemes. Easier payment terms. Faster settlement of claims. Granting exclusive territories or large individual accounts. Sales force compensation/incentive schemes. Lower inventory holding norms.

Motivating Channel Members

 Non monetary motivators:
Coercive power Refers to power of one intermediary over another, when a member expects punishment for his failure to comply with the wishes of the former party. Opposite of reward motivators. Should be adopted only when all other tools fail to bring about the desired changes in the channel member, as it can act as a de-motivator. Main tools are:
   

Reduction in margins. Withdrawal of rewards previously granted. Slowing down of supplies. Tougher operational norms.

Motivating Channel Members

Non monetary motivators:
Expert knowledge When a channel member perceives Producer to have some specialised knowledge, it results in Producer having control over the intermediary. Expert knowledge provides the Producer with knowledge leverage to manipulate behaviour of the intermediary. Tools include:
   

Managerial counselling. Sales training for employees. Sales promotion counsel. Advice on sources of items not stocked by intermediaries.

Motivating Channel Members

Non monetary motivators:
Identification basis Whenever dealer prides himself with dealing with a certain Producer, this results in referent power for the Producer. This can be used as a motivator by those Producers who have earned a high degree of customer loyalty.

Motivating Channel Members

 Non monetary motivators:
Legitimate power motivator When a Producer uses its agreements to modulate the behaviour of a channel partner, it is called legitimate power. It is usually used as a referent power avoiding a channel member from behaving in a manner which could be detrimental to the goodwill of the Producer.

Channel Conflict
Channel conflict occurs whenever channel members have distinctly different opinions or perceptions about distribution channel affairs. If no interdependence exists, there would be no basis for conflict. Mutual dependence creates the basis for conflict.

Types of Channel Conflict

3 types:  Horizontal conflict  Intertype conflict  Vertical conflict

Types of Channel Conflict

Horizontal Conflict Occurs amongst similar firms at the same level in a distribution channel. Intertype Occurs amongst different intermediaries at the same level in a channel. Differs from horizontal in that bit occurs among dissimilar institutions. Vertical - Occurs amongst different levels within a channel of distribution.

Causes of Channel Conflict

Goal incompatibility Though channel members share the common goal of maximising their joint effectiveness, each is a separate legal entity. Each has its own employees, owners and interest groups who help shape goals and strategies, some of which may not be totally compatible with those of other channel members. This incompatibility may be the underlying cause of stress, ultimately creating conflict.

Causes of Channel Conflict

Position, Role and Domain Incongruency Changes in specification of position or poorly defined roles may cause conflict. Incompatibility develops within channel arrangements as roles and methods of operation change. Conflict also arises when there is lack of agreement concerning appropriate domain of members.

Causes of Channel Conflict

Communication Breakdown Often is the reason for channel conflict. Could occur in 2 ways:
 1) When a firm fails to exchange vital information with other channel members.  2) Through noise and distortion

Causes of Channel Conflict

Different Perceptions of Reality Conflict occurs when different channel members differ in methods of achieving mutual goals or have different solutions to a mutual problem. Even when they have a strong desire to cooperate, conflict can result from different perceptions of the facts.

Causes of Channel Conflict

Ideological Differences Are similar to those resulting from differences in perceived roles and expected behaviours. Can result from big-business and smallbusiness perceptions of the appropriate role of management.

Resolution of Channel Conflict

Various methods of resolving channel conflict.
     Problem Solving. Persuasion Negotiation Politics Withdrawal

Resolution of Channel Conflict

Problem Solving: Two techniques
 Superordinate Goals : Essentially a goal that all channel members desire but that cannot be achieved by anybody acting alone.. Development of a superordinate goal overrides individual member goals.  Communication Processes : Seeks to alleviate communication noise in distribution channels. More efficient communications in the channel will permit channel members to find solutions to their problems based on common objectives. Meetings and trade publications allow members to develop solutions to common problems and reinforce relationships.

Resolution of Channel Conflict

Persuasion Emphasis is on influencing behaviour through persuasion rather than only sharing information. Specifically, it seeks to reduce conflict about domain. Negotiation The objective is to halt a conflict, no attempt is made to fully satisfy a channel member. Could lead to a compromise, once basic reason for stress is arrested.

Resolution of Channel Conflict

Politics Refers to the resolution of conflict by the involvement of new parties in the process of reaching an agreement. 3 solutions exist:
 Coalition formation : Refers to formation of trade bodies. This is an attempt to alter channel power structure.  Mediation & Arbitration : In mediation, the 3rd party may suggest a solution to the conflict but the channel members are not bound to accept that solution, whereas in arbitration the solution suggested is binding upon the conflicting parties.  Lobbying & Judicial Appeal : Channel members may resort to the Govt. process to resolve conflicts. Attempts to influence the legislative process through lobbying activities are frequent. Court litigation is another means.

Resolution of Channel Conflict

Withdrawal If all other methods fail, then the last option for the termination of conflict is for one firm to withdraw from the relationship.