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Channel-Design Decisions

Designing a channel system calls for analyzing customer needs,


establishing channel objectives, & identifying & evaluating the major
channel alternatives.

Analyzing Customers Desired Service Output Levels


Channels produce 5 service output levels:
1. Lot size: # of units that the marketing channel permits a typical
customer to purchase on a purchase occasion
2. Waiting time: Average time that customers of that channel wait for
receipt of the goods.
3. Spatial convenience: Degree to which the marketing channel makes
it easy for customers to purchase the product.
4. Product variety: assortment breadth.
5. Service backup: add-on services provided by the channel
(installation, repairs, credit).

Establishing the Channel Objectives & Constraints


Channels objectives vary with product characteristics.
Channel design must take into account the strengths & weaknesses
of different types of intermediaries.
Channel design is also influenced by the competitors channels.
Channel design must also adapt to the larger environment.
Legal regulations & restrictions also affect channel design.

Identifying the Major Channel Alternatives


A channel alternative is described by three elements:
1. Types of intermediaries.

It depends on the service outputs desired by the target market & the
channels transactions costs. The company must search for the
channel alternative that promises the most long-run profitability.
2. Number of intermediaries.
Exclusive distribution
Selective distribution
Intensive distribution
3. Terms & responsibilities of channel members
The producer must determine the rights & responsibilities of the
participating channel members, making sure that each channel
member is treated respectfully & given the opportunity to be
profitable.

Evaluating the Major Channel Alternatives


Each alternative needs to be evaluated against three criteria.
1. Economic Criteria
o The first step is to determine whether a company sales force or
a sales agency will produce more sales.
o The next step is to estimate the costs of selling different
volumes through each channel.
o The final step is comparing sales & costs.
Each channel will produce a different level of sales & costs.
2. Control Criteria
The agents may concentrate on other customers products or they
may lack the skills to handle our products.
3. Adaptive Criteria
The channel members must make some degree of commitment to
each other for a specified period of time.

Channel-Management Decisions
After a company has chosen a channel alternative, individual
intermediaries must be selected, motivated & evaluated.

Selecting Channel Members


For some producers this is easy; for others its a pain in the ass.
Anyway, in order to select them, producers should determine what
characteristics distinguish the better intermediaries (years in business,
other lines carried, solvency, reputation, etc.)

Motivating Channel Members


Constant training, supervision & encouragement. Producers can draw on
the following types of power to elicit cooperation:
Coercive power. Manufacturer threatens to withdraw a resource or
terminate a relationship if intermediaries fail to cooperate. Produces
resentment.
Reward power. Manufacturer offers intermediaries extra benefits for
performing specific acts.
Legitimate power. Manufacturer requests a behavior that is
warranted by the contract.
Expert power. Manufacturer has special knowledge that the
intermediaries value.
Referent power. Intermediaries are proud to be identified with the
manufacturer.

Evaluating Channel Members


Underperformers need to be counseled, retrained or re-motivated. If they
do no shape up, it might be best to terminate their services.

Modifying Channel Arrangements


Periodic modification to meet new conditions in the marketplace.
Modification is necessary when:
Distribution channel is not working as planned.
Consumer buying patterns change.
Market expands.

New competition arises.


Innovative channels emerge.
Product moves into later stages in the product life cycle.
3 levels of channel adaptation can be distinguished:
1. Adding or dropping individual channel members.
2. Adding or dropping particular market channels.
3. Developing a totally new way to sell goods in all markets.

Channel Dynamics
Conventional marketing channel
Comprises an independent producer, wholesaler(s) & retailer(s).
Each is a separate entity.
No channel member has complete or substantial control over the
other members.
Vertical Marketing Systems
1. Producer, wholesaler(s) & retailer(s) act as a unified system.
2. They all cooperate.
3. Can be dominated by any of the three members of the system.
4. It arose as a result of strong channel members attempts to control
channel behavior & eliminate the conflict that results when
independent channel members pursue their own objectives.
5. Has become the dominant mode of distribution in the U.S. consumer
marketplace.
Three types of VMS:
1. Corporate VMS
Combines successive stages of production & distribution under single
ownership. (Sears).

2. Administered VMS
Coordinates successive stages of production & distribution through
the size & power of one of members (Kodak, Gillete, P&G)
3. Contractual VMS
Independent firms at different levels of production & distribution
integrating their programs on a contractual basis to obtain more
economies &/or sales impact than they could achieve alone. 3 types:
o Wholesaler-sponsored voluntary chains
o Retailer cooperatives
o Franchise organizations
Horizontal Marketing Systems
Two or more unrelated companies put together resources or programs to
exploit an emerging marketing opportunity.
Multichannel Marketing Systems
A single firm uses two or more marketing channels to reach one or more
customer segments. By adding more channels, companies can gain 3
important benefits: increased market coverage, lower channel cost, more
customized selling.

Roles of Individual Firms in the Channel


Insiders. Members of the dominant channel.
Strivers. Firms seeking to become insiders.
Complementers. Not part of the dominant channel
Transients. Outside the dominant channel & do not seek
membership. Short-run expectations.
Outside innovators. Real challengers & disrupters of the dominant
channels.

Channel Cooperation, Conflict & Competition


Types of conflict & competition

Vertical channel conflict exists when there is conflict between


different levels within the same channel.
Horizontal channel conflict exists when there is conflict between
members at the same level within the channel.
Multichannel conflict exists when the manufacturer has established
two or more channels that compete with each other in selling to the
same market.

Channel Cooperation, Conflict & Competition


Types of conflict & competition
Vertical channel conflict exists when there is conflict between
different levels within the same channel.
Horizontal channel conflict exists when there is conflict between
members at the same level within the channel.
Multichannel conflict exists when the manufacturer has established
two or more channels that compete with each other in selling to the
same market.

Causes of Channel Conflict


Goal incompatibility
Unclear roles & rights
Differences in perception
Intermediaries great dependence on the manufacturer

Managing Channel Conflict


Some channel conflict can be constructive. It can lead to more
dynamic adaptation to a changing environment. But too much is
dysfunctional.
Perhaps the most important mechanism is the adoption of
superordinate goals. Working closely together might help them
eliminate or neutralize the threat.

Exchange of persons between two or more channel levels is useful.


Cooptation is an effort by one organization to win support of the
leaders of another organization by including them in advisory
councils, boards of directors, etc.
Encouraging joint membership in & between trade associations.
When conflict is chronic, the parties may have to resort to diplomacy,
mediation or arbitration.

Legal & Ethical Issues in Channel Relations


Exclusive dealing
Exclusive territories
Tying agreements
Dealers rights