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Marketing Channels
1. Where Mission Meets Market

Learning Objectives
After reading this module, you should be able to:
Discuss how pooled resources, collective goals, connected systems, and flexibil-
ity relate to successful marketing channels.
Defend the association between a marketing organisations mission statement
and the market(s) that it serves.
Define a marketing channel, and explain how marketing channels create ex-
change utility.
Trace the evolution of marketing channels from a production to a relationship
Define channel intermediaries and explain how they create customer value.
Describe how the definition of marketing channels relates to the Channel
Relationship Model (CRM).

1.1 The Elements of Successful Marketing Channels
1.2 What Is a Marketing Channel?
1.3 Evolution of Marketing Channels
1.4 Channel Intermediaries: The Customer Value Mediators
1.5 Channel Relationship Model (CRM)
1.6 The CRM: Compass Points
1.7 Key Terms

Learning Summary
Marketing channels have traditionally been viewed as a bridge between producers
and users. However, this perspective fails to capture the complex network of
relationships that facilitate marketing flows: the movement of goods, service,
information, and so forth between channel members. Marketing and distribution
were inextricably intertwined at the beginning of the twentieth century. As the
production era of marketing emerged, the demand for middlemen increased. In a
historical sense, these middlemen contributed substantially to the movement of
goods and people from rural area to new industrialised urban centres. By the 1940s,
when the selling era in marketing began, new sort of middlemen now known as

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intermediaries had surfaced in the marketplace. Large retailers expanded further,

while smaller retailers generally settled into unserved or underserved market niches.
The selling era rather quickly gave way to the marketing concept era. The increasing-
ly widespread recognition of the importance of the marketing concept during the
latter half of this century has been paralleled by an emerging behavioural thrust in
marketing channels.
Since the core of marketing is the exchange process, marketing channels can be
viewed as exchange facilitators. This allows marketing channels to be defined as an
array of exchange relationships that create customer value in the acquisition,
consumption, or disposition of goods and services. Exchange relationships, and
thus marketing channels themselves, emerge from market needs as a way of more
efficiently serving market needs. Exchange utility is the sum of all costs and benefits
recognised by the exchange parties. Utility can feature form, place, possession, and
time dimensions.
This broadened definition of marketing channels offers several advantages: (1) it
allows marketing channels to be studied as behavioural systems, (2) it extends the
scope of the functions performed within marketing channels to include those
involved with usage and disposition, and (3) it illustrates the trade-off of costs and
benefits that inevitably occur in exchange relationships.
A sense of shared purpose connects organisations and individuals in the market-
place. This is also true of marketing channels. For this reason, the activity known as
channel management can be viewed as the point at which an organisations mission
and the market(s) it serves come together. An organisations mission is its strategic
charter that describes the ways the firm will seize market opportunities while
satisfying the needs of internal and external customers. A mission statement also
describes who the firm intends to serve, how it intends to serve them, and what means
will be used to establish competitive advantages in the market(s) of interest. Toward
this end, the overriding mission of channel intermediaries is to serve as middlemen.
But this role should be broadly defined for any organisation or individual who
mediates exchange is a middleman. Channel intermediaries serve four key functions:
to promote contactual efficiency and routinisation, to provide assortment, and to
minimise uncertainty.
A contemporary relationship-oriented approach to the study of marketing channels
is adopted in this book. A Channel Relationship Model (CRM) serves as a framework
for presenting the material addressed throughout the text. Three fundamental
interactions are shown in the CRM. The first occurs within the marketing organisa-
tion. The second develops between marketing organisations. The last interaction
unfolds between marketing organisations and their environments. Through the CRM,
the role of channel environments, channel climates, and interaction processes in
fostering business relationships is investigated. The CRM perspective will ultimately
enable you to better understand how exchange partners can achieve their strategic
aims through interacting in marketing channels and dynamic marketplaces.

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2. Channel Roles in a Dynamic Marketplace

Learning Objectives
After reading this module, you should be able to:
Relate role identity to channel member performance.
Compare and contrast the wholesaling and retailing channel functions.
Discuss major trends in the wholesaling and retailing sectors.
Demonstrate how SIFTing can be used to establish differential advantage in the
In ecology, the principle of interspecific competition maintains that when similar species
compete for scarce resources, less-fit competitors usually perish This concept can
also be applied to the complex environments in which channel members compete.
In business, all successful channel members have evolved to meet the particular
demands of their competitive environments. This evolutionary process is never
The Channel Relationship Model (CRM) illustrates the complex environments in
which channel members operate. The principle of interspecific competition suggests
that channel members must also fight to achieve competitive advantages. Three
outcomes are possible as a result of interspecific competition. They are:
Competitive Superiority. A particular channel member may emerge as competi-
tively superior. This superiority can force rival organisations into extinction as
competitors for limited resources are eliminated. This is the essence of the Dar-
winian concept called survival of the fittest. Transportation industry channels
are littered with the carcasses of companies, such as Pan American Airlines, who
failed to change as their competitive environments changed.
Restrictive Ranges. The competitive advantages of channel members may
differ across distinctive environmental conditions. Thus, another possible out-
come is that some organisations prosper in one place while others flourish in
different domains. This process is known as range restriction. Ideally, each organi-
sation recognises its limitations in any environment, and then chooses to
compete in the setting most conducive to its well-being. For instance, Sears rec-
ognised that its expertise (and future) lay in retailing, and pulled out of the
financial services industry. Realistically, however, many organisations fail to rec-
ognise the perils of their current environment until after it is too late to act.
Character Displacement. The final possible result is that channel members
rapidly evolve in diverse ways, taking on different properties to minimise direct
competition. This process is called character displacement. It suggests that each cor-
porate species must continuously adapt to dynamic channel environments.
Harried grocery shoppers are increasingly turning toward online grocery shop-
ping as a convenient alternative to physically visiting a store, for example.
These outcomes of interspecific competition promote role specialisation in com-
petitive channel environments. In this module, we will discuss the types of roles that
develop out of interspecific competition. First, however, we need to look at the

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behaviours that channel members must develop in response to the strengths and
weaknesses of other firms. They must also respond to opportunities and threats in
the environment itself. Over time, these adaptive behaviours may become nearly

2.1 Channel Behaviours in Competitive Environments
2.2 Channel Roles in the Exchange System
2.3 Supplier Relationships
2.4 Customer Relationships
2.5 Lateral Relationships
2.6 Establishing Channel Role Identities
2.7 Key Terms

Learning Summary
Marketing channel members have to adapt to attain or maintain their positions in
increasingly competitive markets. In this process of adaptation, each channel
member attempts to differentiate itself from any other member. This process
describes the pursuit of a differential advantage. A differential advantage may be
viewed as the marketplaces perception of an organisations distinctive characteris-
tics that set it apart from competitors in ways enticing to customers. Each business
entity must distinguish itself in some way to persist and/or prosper in a competitive
Channels are not formed through an arbitrary process. Instead, an underlying
structure shapes members behaviours. This structure makes it possible to explain
and predict how channel members will perform in market settings. The basis for
this structure is referred to as channel roles. Channel roles are sets of activities or
behaviours assigned to each intermediary operating in a channel system. Over time,
each channel member will attain a special role identity. Role identity specifies the
characteristics of an individual or organisation that are considered appropriate to
and consistent with the performance of a given channel role. New channel role
expectations encompass the exchange attributes and benefits expected by custom-
ers. Role expectations capture the potential of alternative channel intermediaries to
satisfy the consumption decision criteria.
All intermediaries play a negotiatory function within marketing channels. The
negotiatory function can take different forms and extends beyond assembling,
grading, and sorting products. Intermediaries may intercede in the distribution,
merchandising, and/or service processes associated with marketing flows. Some
intermediaries simply provide a means for transportation and logistics management,
while others supply merchandising assistance to sellers. Still others offer a variety of
intermediary services to the channels they serve, ranging from the warehousing of
goods to the provision of consumer services.
It is clear that channel members play a variety of roles in the flows of goods and
services from producer to ultimate user. These channel roles emanate from the

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nature of channel member interactions or relationships and can be categorised into

supplier, customer, and lateral relationships. Supplier relationships include source
firms, producers, and wholesalers. Each of these channel members sells goods for
input into production processes or for resale. Wholesalers market products and
services for resale or institutional use. Customer relationships are handled by
another type of intermediary: retailers. Retailers sell products or services to the
ultimate consumer. Lateral relationships occur between channel members at
relatively equivalent positions in the channel system.

3. Conventional Marketing Systems

Learning Objectives
After reading this module, you should be able to:
Discuss how conventional marketing channels are like business teams.
Explain conventional channel design.
Discuss why channel design decisions are critical to the success of marketing
organisations and marketing channels.
Discuss the various channel design options.
Describe how to identify the best channel design.
Explain how to evaluate the performance of channel structures and how to
modify existing channel arrangements.
Discuss the growth of multichannel marketing systems and how to design
channels to capture channel positions.
Design issues are critical in marketing channels. Issues such as selecting the right
members, assigning them the proper functions, and having everyone fulfil their
responsibilities can mean the difference between success and failure. In the Channel
Relationship Model, market coverage, efficiency, effectiveness, and service levels are
issues which must be confronted in channel design. In this module, we will discuss
these issues.

3.1 Conventional Marketing Channels as Organisational Teams
3.2 Conventional Marketing Channels: Issues and Answers
3.3 Making the Channel Design Decision
3.4 Selecting the Best Channel Design
3.5 Evaluating Channel Structure Performance
3.6 Modifying Existing Channels
3.7 Designing Channels to Capture Channel Positions
3.8 Real-World Channel Design
3.9 Key Terms

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Learning Summary
Good channel design is often the key to market leadership and overall business
success. Because they generally require years of continuous attention to develop,
sound manufacturerintermediaryend-users linkages are often barriers to competi-
tive entry. Without the benefits that accrue from solid market channels, even
marketers with superior products can fail in the marketplace.
Using channel design as a strategic weapon creates sustainable competitive ad-
vantages (SCAs). SCAs refer to skills that a firm does exceptionally well which also
have strategic importance to that business. SCAs allow firms to gain an advanta-
geous position in the market relative to their competitors on a long-term basis.
Channel design decisions are among the most critical facing marketing managers.
The type of channel chosen directly influences each of the other marketing deci-
Marketing channels essentially perform the task of moving goods from producers
to consumers. In doing so, they overcome the time, place, and possession gaps that
separate goods and services from the consumers. To achieve these critical out-
comes, channel members must perform several key marketing functions, including
information, promotion, negotiation, risk-taking, and billing, among others.
The process by which various channel design alternatives are evaluated in terms
of their performance competencies is known as channel efficiency analysis. This
assessment centres on the relative performance of alternative channel designs.
Channel effectiveness analysis on the other hand, considers the strategic fit with the
overall marketing strategy of potential changes in the channel design. When
compared to efficiency analysis, the evaluation of effectiveness factors in a market-
ing channel requires that the evaluator assume a longer time horizon.
A variety of circumstances can indicate that a marketing organisation needs to
design or redesign its channel. Such circumstances would include the organisations
development of a new product or entire product line, its decision to target existing
products or product lines to new consumer/business markets or geographic areas,
or an awareness that significant changes have been or are about to be introduced to
some other aspect of the organisations marketing mix. Moreover, such circum-
stances could arise when existing channel members change their policies,
consistently fail to perform as expected, or are engaging in practices that cause
conflict. When a new firm is established, either from scratch or as the result of
merger or acquisition, the need to establish new channel arrangements is clear.
The various channel structural alternatives available to a producer firm can be
identified in terms of the following three dimensions: (1) the number of levels in the
channel, (2) the number of intermediaries operating at the various levels, and (3) the
types of intermediaries used at each level. Each intermediary that performs a
function necessary to convey the market offering closer toward the final user
represents a channel level. A channels length is described by the number of its
intermediary levels. Second, companies must determine the number of intermediar-
ies to be used at each channel level within a given market area. Three basic designs
are available: intensive, exclusive or selective distribution.

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Finally, firms must identify the types of intermediaries that are available at each
channel level. The following distribution alternatives are generally available: manu-
facturers salesforce, manufacturers representatives, or industrial suppliers. In most
instances, producers will be able to identify several intermediary alternatives. The
intermediary alternatives need to be evaluated against expected sales and costs,
control and resources, and flexibility criteria.
The best channel structure is reflected in the design that offers the desired per-
formance effectiveness, at the lowest possible cost, along each marketing function
to be executed. Unfortunately, reality dictates that the selection of the optimal
channel design will often prove impossible. Therefore, managers should strive for
the best possible design alternative by evaluating the various design options along
the following criteria: service output levels desired by customers, channel objectives
and product characteristics and market behaviours and segments.
Once they have entered into a channel arrangement, channel members should
periodically review their intermediaries performance. Channels or intermediaries
can be evaluated on the: quality of their customer service, competence with which
they manage the marketing functions assigned to them, share of the market they
have achieved in the assigned area and their potential for additional share gains, and
the level of attention they pay to the manufacturers product(s).
Channel adjustments purposeful modifications to intermediary relationships
become necessary when conditions in the marketplace change. Three specific types
of channel modification are those associated with product life cycles, customer-
driven refinement, and the need for multichannel systems. The most difficult
adjustments are those whose implementation necessitates revising overall channel
Meeting customer needs is a necessary but insufficient condition for success in
the marketplace. In marketers attempts to foster every edge possible through
channel design, the concept of a channel position should not be overlooked. A
channel position is reflected in the status a channel member earns among intermedi-
aries for supplying market offerings, financial returns, programmes, and systems that
are better than those offered by competing manufacturers. An enticing channel
position can be achieved by treating each relationship with ones fellow channel
members as partnerships that should provide desired benefits to the partner on a
long-term basis. Channel members should strive to provide their intermediaries with
superior value from the resale of products, support programmes and incentives, or
the channel relationship itself, relative to those outcomes offered by other produc-
ers. This is known as the pursuit of a sustainable partnership advantage and, in their
channel design efforts, marketers should also be guided by this goal.

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4. Marketing Mix and Relationship Marketing

Learning Objectives
After reading this module, you should be able to:
Describe why the marketing mix variables are ingredients in successful channel
Define the concept of product and the interface between product and relationship
Relate agile competitive environments to the notion of products-in-process.
Explain the general approaches to marketing channels pricing, and identify the
relative advantage of the relationship pricing approach.
Distinguish between push and pull promotion strategies and relate these
strategies to relationship building.
Demonstrate an understanding of the link between place and marketing channel
Explain how relationship building may ultimately attain the marketing concept.

4.1 The Marketing Mix
4.2 The Product Ingredient
4.3 The Pricing Ingredient
4.4 The Promotions Ingredient
4.5 The Place Ingredient
4.6 Strategy Formulation: Role of the Marketing Concept
4.7 Key Terms

Learning Summary
The marketing mix offers the means by which the product, pricing, promotion, and
place variables present in a channel relationship can be strategically apportioned to
meet the channels needs. Marketers must carefully consider how to combine the
marketing mix ingredients to achieve the desired relationship outcomes. These mix
elements are the manageable components by which the norms, behaviours, and
functional outcomes of marketing relationships can be developed over time.
A product is a unique bundle of intangible and tangible attributes offered en masse
to customers. Products provide the vehicles through which exchanges of value can
simultaneously satisfy buyer and seller needs. Portraying products as value satisfiers
in marketing relationships implies channel members should transform their opera-
tions from function delivery systems to value delivery systems. In a function delivery
system, marketers attentions are typically focused inward; products begin with the
organisation and channel partners aim to develop superior physical processes for
moving products from the factory to the market. In a value delivery channel system,
marketing attentions are first focused upon external concerns. Channel partners
look outward to identify customer needs. Products, thus, originate from a desire to
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satisfy customer needs. The value delivery sequence involves the assessment,
provision, and communication of customer value.
Price is the final exchange value of a good or service, as has been agreed upon by
the seller and buyer. Any discussion of pricing should begin with the notion of
valuation, or the simultaneous appraisal by potential channel partners of an offer-
ings economic and psychological worth. In marketing channels, each exchange
partner provides some added value to the offering. Channel members expect and
must receive compensation in exchange for their role in enhancing the value of an
exchange object. The price should allocate compensation proportionate to each
channel members contribution. Algorithmic (cost-plus, break-even, modified break-
even), market-orientated (competitive pricing, market-entry, skimming-the-cream)
and relationship-orientated (volume pricing, functional allowances, promotional
allowances) methods of setting prices exist and each can be applied within market-
ing channels. An underlying factor influencing any channel pricing decision, but in
particular relationship-orientated pricing decisions, is the notion of establishing price
legitimacy, or the convergence of the buyers and sellers valuation of a market
Price-legitimising techniques are supposed to communicate a sense of fair play to
customers. The seller is attempting to promote a sense of value to customers.
Promotion involves any purposeful communications employed by channel members
to inform, remind, and/or persuade prospects and customers regarding some aspect
of their market offering. In channel relationships, promotion is a portfolio of
persuasive tactics that can be wielded with the purpose of informing, changing
preferences and attitudes, positioning and/or repositioning products, and, ultimate-
ly, stimulating sales. But the contemporary view also posits promotions as a means
of relationship building. Relational promotion involves any communications
between channel members that is intended to facilitate new or fortify existing
exchange relationships. Over time, relational promotions should lead to relational
communication. Relational communication is a continuous process in which the
sender and receiver of a message become essentially indistinguishable, since the
message and feedback become virtually simultaneous events. The outcome of
relational communications is shared meaning, or synchronous cognition. Five
objectives are usually associated with relational channel promotions: stimulating
sales, sharing information, differentiating offerings, accentuating value, or stabilising
seasonal demand. Relational promotions tactics can be classified into two strategic
categories, consisting of pull and push promotions.
The final ingredient in the marketing mix of any channel participant is place, or
all those distribution, logistics, and behavioural functions that regulate the flow of
market offerings between exchange partners. The goal of place is to minimise the
costs of these functions while maximising customer satisfaction. A trade-off exists
between channel costs and the benefits afforded to exchange partners. These trade-
offs are linked to the other ingredients in the marketing mix.
The four components of the marketing mix support a channel members market-
ing strategy and, ultimately, its market offering. A marketing strategy can be defined

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along three basic dimensions: the channel members markets, functional area
strategies, and strategic assets or skills.
The marketing concept is the core of any marketing mix strategy. It asserts that
customer satisfaction is the basis for all marketing mix decisions. The contemporary
view is that this idea needs to be taken one step further, to a relationship marketing
concept. The marketing relationship concept is the culmination of all exchange
relationships; it delivers exchange value by addressing simultaneously the needs of
each link in the marketing channels and produces long-term relationships and
profits by creating more customer satisfaction.

5. Environmental Scanning: Managing Uncertainty

Learning Objectives
After reading this module, you should be able to:
Understand how channel members affect and are affected by the channel
Discuss the importance of dynamism in marketing channel flows.
Identify the environmental variables that affect marketing channels.
Describe the impact of internationalisation on environmental scanning.
Relate the political economy model to contemporary marketing channels.
Explain how the political economy framework encourages a social system
perspective for managing the channel environment.
A marketing channel must continually adjust to its external environment economic,
technological, political, legal, ethical, and sociocultural factors. Look back at the
Channel Relationship Model and notice that the internal channel environment the
relationship process within a marketing channel is encased in this external
environment. These macroenvironmental forces that change the movement and
shape of a marketing channel are the topic of Part 2.
Channels are always changing even when they dont appear to be because their
environments are never static. Moreover, current conditions in the channel environ-
ment can influence the strength of the channel relationship. The environment can
either enhance or lessen a channel members control over its counterparts. Changing
environmental conditions can also affect channel participants in different ways. As
such, channel partners must be concerned with more than just how changes affect
their own operations; they must be aware of how the channel environment influences
all channel members.
In addition to continual change, three other properties have relevance to channel
environments: variability, potency, and distinctiveness.
Variability. The development and subsequent performance of marketing
channels depend on the ever-changing environment. Channel relationships are

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actually moving even when they appear static. Whether and how channel mem-
bers remain connected to one another is related to environmental influences.
Potency. Current conditions in the channel environment influence the strength
of the channel relationship. The environment may either enhance or lessen a
channel members control over its counterparts.
Distinctiveness. Each channel member is unique. Changing environmental
conditions affect channel participants in different ways. As such, channel part-
ners must be concerned with more than just how environmental changes affect
their own operations; they should also be aware of how the channel environment
influences all channel members.
A channel member engages in practices which transform its surrounding envi-
ronment. For instance, if many producers in a country opt for cheaper, but highly
skilled, labour overseas to reduce costs, this can have a detrimental effect on the
home economy, leaving people under- or unemployed and lessening the purchase
power of the marketplace.
Two other properties are important to us. First, the impact that any environmen-
tal variable has on channel relationship is irreversible. Once something has altered the
state of the channel relationship, it will never be the same again. This is not to say
that channel members cannot successfully adapt to their changing environment;
they can. However, the influence of environmental forces on channel relationships
is nonetheless permanent and has a lasting effect on the performance of the
marketing channel.
The second relevant property is the fact that channels inevitably must expend
energy to preserve relationships in the wake of environmental change. This con-
sumption of energy is known as entropy. Entropy accounts for the disorder,
uncertainty, and wasted effort present in any physical environment. Unless preven-
tative measures are taken, entropy always increases through a naturally occurring
process. As a result, channel managers must continually struggle against entropys
negative effects. This is particularly difficult because of the constant yet unpredicta-
ble forces of the external environment that impact marketing channels.

5.1 Entropy and Environmental Scanning
5.2 Decision Support Systems
5.3 The External Channel Environment
5.4 Internal and External Political Economies: An Environmental Framework
5.5 Key Terms

Learning Summary
Entropy accounts for the disorder, uncertainty, and wasted effort present in any
physical environment. Entropy always increases in any naturally occurring process
including working systems such as marketing channels. Channel members always
operate under conditions of uncertainty and entropy. Together, these characteristics
make environmental scanning a necessity. Environmental scanning involves the
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appraisal, prediction, and monitoring of all external factors that may substantially
impact a channel system. A great many performance problems may be linked to
circumstances where the behaviours of channel members remained static while their
channel environments changed.
To achieve the state of equilibrium they naturally seek, organisms must receive
and respond to information cues from their environment. Similarly, if channel
members are to accurately assess their position in the system, they must obtain
useful market intelligence for decision making. Here, market intelligence refers to
data that is useful as an input into managerial decision making. In this way, all
channel members are, or at least ought to be, information seekers.
Information overload refers to those situations where the capacity of channel
members to comfortably manage data is strained because of excessive amounts of
information. To avoid such overload, channel members must first decide which
information will be most useful for making channel decisions. Information overload
can also open up market opportunities. Channel members sometimes receive
conflicting accounts of changes in the environment. Thus, they must address the
accuracy and precision of this market intelligence the degree to which they can use
it with confidence or certainty. Because information is so valuable to channel
members, it is also a competitive resource. Environmental information is especially
valuable because it assists channel members in planning for the future. When
properly used, environmental information can also help fortify the trust between
exchange partners. But there is still potential for problems and misuse.
Channel environments are entropic because they are characterised by a property
known as dynamism. The notion of channel dynamism is that energetic environ-
mental forces concurrently emanating from and directed toward marketing channels
are constantly changing. As a result, channel managers need to be flexible, prepared,
and attuned to their surroundings. However, merely recognising the existence of a
changing environment is insufficient to safeguard success. For that, exchange
partners must continuously scan the environment. Successful scanning also requires
that channel members assume a disaggregate orientation, in which channel members
do not view the environment as a single or complete entity.
Five key components of the environment must be monitored: competitive, eco-
nomic, technological, sociocultural, and legal, ethical, and regulatory. Four types of
competitive channel environments exist. Horizontal competition occurs between
channel members operating at the same level. Vertical competition occurs when
channel members operating at different channel levels compete for a share of the
same market. System competition occurs among complete channel units. Network
competition occurs among a labyrinthine network of channel members contending
across industries and markets.
Predicting and responding to the anticipated impact of the economy is a particu-
larly important aspect of channel management. Yet no single environmental issue is
more difficult to forecast. The state of the economy is constantly being measured
through a variety of indicators, ranging from gross domestic production to consum-
er confidence indices. The nature of any cues about the state of the economic
environment is always tempered by the conditions prevailing within the following
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four economic indicators: economic infrastructure, consumer buying power,

currency stability, and national trade policies.
The first, critical step in environmental scanning is identifying what questions to
ask. These questions might pertain to: current or future trends, customer prefer-
ences, industry directions, success or failure of current channel strategies, and
competitors strategies. The answers to these questions can be gathered and
interpreted through a decision support system (DSS). Only the information that is
likely to prove useful should be entered into a DSS.
The technological environment encompasses those processes by which
knowledge-based products and information itself are introduced into channel
systems. Because technology is predicated on information sharing, one can easily see
how channel relationships might develop for the sole purpose of research and
development. A sense of a technological imperative is now emerging in many
channels settings. The technological imperative suggests that most channel structure
is derived from the prevailing technology operating within the channel. Two general,
technology-based channel structures currently exist that influence channel relation-
ships. One, called pooled interdependence, describes two channel members who
operate independently, but whose pooled resources contribute to each members
overall success. The other technology-based channel structure is known as sequen-
tial interdependence. In sequential interdependence, technology, and the changes
that generally accompany it, is pushed through channel members. Information and
technological flows are essentially one-way. For a two-way exchange to occur
requires an integration of channel members technology-based knowledge. This
results in a reciprocal imperative.
When the values, attitudes, and lifestyles of consumers change, channel members
must adapt their need-satisfying marketing mix strategies in response to these
consumers changing needs. This process changes the products and services all of us
acquire, use, and dispose of in our roles as consumers. The sociocultural environ-
ment exists as the point of connection between channel members, society, and its
culture. In fact, the sociocultural environment is truly an aggregation of all other
environmental factors.

6. Legal Developments in Marketing Channels

Learning Objectives
After reading this module, you should be able to:
Provide an overview of the US antitrust legislation that relates to marketing
Discuss the differences between per se- and rule of reason-based court decisions.
Discuss how existing legislation influences channel practices such as tying
arrangements, resale price maintenance, and dual distribution.

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Discuss evolving legal issues such as slotting allowances and parallel import
Understand the difference between legal and ethical imperatives in channel
Risk-taking involves any activity where there is a chance of loss. Decisions to take
part in channel relationships always expose each participant to various types of risk.
Many of these risks are economic, psychological, or social in nature. But channel
relationships also involve legal risks. Although one would assume clear guidelines
are in place that permit an accurate assessment of the legal risk associated with
channel decisions, this is not entirely the case. The judicial system that has evolved
to protect business interests still permits only educated guesses concerning the
legality of many channel activities. The US justice system colours most legal issues in
shades of grey, rather than in black or white.
US antitrust legislation is a model of flexible law, capable of evolving with chang-
ing times and unforeseen circumstances. As a result of its inherent flexibility, the
legality of several channel practices is far from clear and so the possible risks can
only be estimated. Antitrust law, for instance, is rarely certain. Instead, it depends
ultimately on how judges and juries see the facts, then evaluate these facts based on
the law. Because laws are written and passed in Congress, it is impossible to separate
politics from US antitrust legislation. As such, the legal and political components of
the external environment are a distinct force in the CRM.
Firms that want to manage their channel relationships with the utmost efficiency
must understand the laws that apply to their particular marketing activities. Regard-
less of how they arise, legal problems in competitive markets can be neither avoided
nor resolved without a general understanding of the relevant laws. The laws defining
the nature of legal channel behaviours must be understood as a complete body, even
though that is not how they evolved. Otherwise, a course of action intended to
avoid or escape one legal transgression may only result in a firm being entangled in
the web of another law.
When developing channel strategies, managers must understand the laws affect-
ing those strategies, as well as the legal defences available under those laws. Perhaps
most importantly, channel managers must also understand how the courts interpret
these statutes. These interpretations establish precedents regarding what is and what
is not acceptable channel practice. Finally, effective managers should be sensitive to
signals that suggest these legal roadmarks are likely to be redefined in the future. In
this module, we present an overview of the US laws affecting channels practices and
discuss their judicial interpretations. We also look briefly at what the future holds in
the way of emerging legal issues. Finally, we discuss the best means for staying clear
of possible legal difficulties by acting ethically.

6.1 A Historical Overview of Federal Legislation Affecting Channel Practices
6.2 Traditional Legal Issues in Channel Relationships
6.3 Emerging Legal Issues in Channel Relationships

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6.4 Moving Beyond Legality: Toward Ethical Channel Management

6.5 Key Terms

Learning Summary
The US government seeks to harmonise the profit-seeking behaviours of channel
members with the interests of other channel members, competitors, and the
consuming public. Federal antitrust and pricing laws are the most important tools
wielded by the government in this quest. Antitrust law in the US generally rests
upon three statutes: the Sherman Act of 1890, Clayton Act of 1914, and Federal
Trade Commission Act of 1914. Jointly, this legislation inhibits or prohibits business
activities that represent unfair methods of competition and/or tend to lessen free
market competition. Pricing behaviours are governed principally by the Robinson-
Patman Act of 1936. The Celler-Kefauver Act was passed in 1950 to regulate
horizontal or vertical mergers that tended to inhibit free market competition. Both
of these later acts were passed to close loopholes in original antitrust legislation.
The Sherman Act introduced two important concepts. One is the per se rule. To
win judgment under a per se rule, a complainant need only prove the existence of a
certain prohibited practice and that this conduct falls within a class of plainly
anticompetitive practices. The other concept is known as the rule of reason. Under
rules of reason, the courts undertake a broader inquiry into the facts associated with
the dispute. Specifically, the history leading up to the dispute, the reasons why the
disputed practices were implemented by the accused firm, and the effect the
disputed practices have on competition in and outside of the channel are consid-
ered. When channel disputes arise, judgments are more likely to be based on the rule
of reason.
Several channel behaviours have traditionally been subject to evaluation under
antitrust and pricing legislation. These practices include price discrimination, resale
price maintenance, vertical integration and mergers, dual distribution, tying ar-
rangements, refusals to deal, and resale restrictions. Each of the other practices is
prohibited when certain circumstances are present or when certain market condi-
tions are met. The nature of these circumstances or conditions is, however, subject
to debate. More recently, the legality of slotting allowances and parallel import
channels have been called into question. Slotting allowances are currently legal.
Some types of parallel imports channels are viewed as illegal, while others are not.
To this day, the legality or illegality of several channel practices represents some-
thing of a game of chance. Since no one really knows in advance when an injury to
competition will be claimed or how the courts will rule, channel members should
avoid engaging in legally risky behaviours altogether. This goal can be achieved
through moral channel management. The moral organisation operates well above
the ethical standards prescribed by the law itself.

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7. Ethical Issues in Relationship Marketing

Learning Objectives
After reading this module, you should be able to:
Understand the importance of ethics in building and sustaining channel relation-
Describe the ethics continuum and the balance of interest between buyers and
Identify and discuss the basic ethical dilemmas that can arise in marketing
Distinguish between rules-based, consequence-based and experience-based
moral codes.
Describe individual, organisational, and environmental factors that affect a
channel members ethical or unethical behaviours.
Assess why codes of ethics offer no panacea for resolving ethical conflicts in
channel relationships.
Describe the four components which must be in place for an ethical exchange to
occur in a channel relationship.
In the Channel Relationship Model, ethical and social responsibility forces are
important components of the external channel environment. In this module, we will
discuss the nature of moral and ethical behaviour in marketing channels and the
delicate balance between the interests of buyers and sellers. We will then review
several ethical dilemmas encountered by channel members in the competitive
marketplace. We also discuss a variety of approaches to moral decision making that
are available to help channel members resolve these dilemmas and present a model
of relationship ethics.
Most marketers agree that marketing decisions should be made in accordance
with accepted ethical principles. Ethics, after all, lay out the differences between
right and wrong. But just what is meant by the term ethics? A variety of definitions
have been offered:
Ethics refers to standards of right conduct.
Ethics is an inquiry into the nature and grounds of morality where the term
morality is taken to mean moral judgments, standards and rules of conduct.
Ethics comprise moral principles and standards that guide behaviour.
Ethics is the art and discipline of applying ethical principles to examine and
solve complex moral dilemmas.
Each definition is clearly concerned with the relationship between morality and
decision behaviour. We provide a definition of marketing ethics that summarises the
descriptions offered above: Marketing ethics refers to the moral standards that
underlie exchange processes. This definition is applicable to marketing channels
because it advances the position that ethics is predicated on interactive decision

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Critics often charge that marketing is the functional area most likely to be the
source of unethical behaviour in a business. As evidence, these critics point toward
instances of deceptive advertising, unscrupulous sales tactics, misrepresented
product capabilities, and unfair pricing tactics. For more than a century, marketers
have been singled out as the perpetrators of unethical actions against consumers and
other businesses. This is because marketing is the business function most responsi-
ble for communicating with prospects and customers and satisfying their needs. As
such, the actions of marketers are clearly in the public view and susceptible to close

7.1 Personal Conviction and Exchange Conviction
7.2 Social Tact and Relationship Ethics
7.3 The Ethics Continuum
7.4 Ethical Dilemmas in Relationship Management
7.5 Moral Codes in Channel Relationships
7.6 Model of Relationship Ethics
7.7 The Components of an Ethical Exchange Process
7.8 Key Terms

Learning Summary
There is substantial opportunity to act unethically within many types of marketing
relationships, a circumstance that is no doubt facilitated by the fact that marketing is
clearly in the public view and susceptible to close scrutiny. Still, marketers interests
are always best served by seeking a trusting, ethically grounded relationship with the
various publics they serve. Marketing ethics refers to the moral standards that
underlie exchange processes.
Exchange conviction addresses the intensity of the confidence and faith a given
channel member is willing to invest in the value systems of other channel members.
For successful relationships to develop, each party must have confidence that the
other is equally committed to doing the right or moral thing at all times. Several
factors influence a channel members conviction, including the nature of perfor-
mance outcomes, the competitive arena, expediency, and customs that prevail
within the channel.
It is crucial to acknowledge that morality in marketing relationships is a two-way
street. Ethical behaviour depends largely on the state of cooperative morality that
exists or develops among channel members. A persons ethicality cannot be viewed
as something that is distinct from the social system in which the individual interacts.
This condition is reflected in the concept we call social tact, or individuals pre-
scribed ways of dealing with others in their environment. For relationships to
flourish, as opposed to merely enduring, each exchange partner must modify the
ethical content of their behaviour to pursue moral convergence with some channel
counterpart. This involves relationship ethics, or the process by which organisation-
al ethics are adapted to suit the needs of exchange relationships.

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In marketing channels, one firms ethical actions can affect another firms actions
in many ways. To illustrate, consider the buyerseller relationship itself. The buyer
has to be aware of the sellers persuasive tactics. But at the other end of an implied
continuum, the seller must pay careful attention to the customers behaviour. This
balance between what can sometimes be essentially opposing views is reflected in an
ethics continuum. On one end of the scale lie the sellers self-interests otherwise
described as caveat emptor. The concept of caveat venditor, or seller beware, lies at the
other end. Caveat venditor draws on the outright pursuit of customer satisfaction as
an organisational ethic. This ethics continuum suggests that channel members, on
either side of exchange relationships, are continually modifying the norms, rules,
and standards governing exchange behaviours. Hopefully, these modifications result
in outcomes that satisfy the other party.
A wide range of channel situations potentially feature ethical dilemmas. The
channel behaviours receiving the most ethical attention over recent years include:
exclusionary tactics, diverting practices, repressive control manoeuvres, and anti-
competitive promotions. Exclusionary tactics are intentional strategies aimed at
restricting normal channel flows in a distribution system. Diverting practices refer to
any actions involved in the unauthorised distribution of goods or services, including
grey marketing. Repressive control manoeuvres describe coercive attempts to
manipulate other channel members business practices and include full-line forcing
tactics. Anticompetitive channel promotions involve opportunistic efforts by one
channel member to unfairly or inappropriately manage the distribution of products
through brand discounts, aggregate rebates, and slotting allowances.
Moral codes address how channel members employ rules and standards to help
decide what is right and wrong. Issues of right and wrong in channel relationships
are not always cast in black or white. Three basic moral codes rules-based,
consequence-based, and experience-based enable decision makers to make more
sense of the often-times complicated notion of right and wrong in channel relations.
Still, no single moral code can guide what is ethical or unethical in all possible
situations. Instead, combinations of all three strategies are probably used to arrive at
morally sound decisions in most situations involving an ethical dilemma.
A variety of individual, organisational, environmental, and relationship dimen-
sions influence an individual channel members moral reasoning and decision
making. Individual factors range from ones personal values to ones upbringing.
The organisational environment consists of the collective values, attitudes and
norms that stem from the goals shared by those individuals who make up the
organisation. In addition, the actions of top management and organisational
referents, as well as the presence or absence of corporate ethical codes, exercise
substantial influence on organisational value systems and, consequently, on the
ethical or unethical behaviours that emanate from within the organisation. The most
promising organisational avenue for preventing or resolving ethical conflicts lies in
the development of an organisational code of ethics. An ethical code should clearly
delineate what the organisation expects from each of its internal stakeholders. But
even the best code will only be effective to the degree that the organisations
designates follow its ethical prescriptions.

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The macroenvironment includes laws and regulations, as well as the sociocultural,

political, and technological rules and standards that form societys values.
Equality of exchange, the promise principle, morality of duty, and morality of
aspiration must all be present for ethical exchanges to occur in channel relation-
ships. Parties to a fair exchange must be equal in need, although not necessarily in
terms of power, knowledge, or moral goodness. The promise principle suggests that
promise keeping is probably the best way to generate trust. Finally, while the
morality of duty is characterised by thou shalt nots, the morality of aspiration is
characterised by thou shalts.

8. Global Challenges and Opportunities

Learning Objectives
After reading this module, you should be able to:
Discuss how environmental uncertainty impacts global channel strategies.
Discuss the major factors that underlie the selection of international exchange
Distinguish between multinational, global, and transnational channel relation-
Recall the indirect methods of developing international exchange relationships.
Recall the direct methods of developing international exchange relationships.
Explain the connection between the macroenvironment and international channel
Describe the process of initiating international channel relationships.
In this module, we examine how channel members in all industries confront
different tastes and preferences in the global marketplace. First, we consider the
reasons for entering into international exchange relationships at all. Next, we explain
the various types of international exchange relationships and the various methods of
entry. Then, we explore the interface between international marketing channels and
their macroenvironment. After all the factors are in place, we answer the question:
how does one select an international exchange partner?

8.1 Reasons for International Exchange Relationships
8.2 Typology of International Exchange Relationships
8.3 Direct and Indirect International Marketing Channels
8.4 Interface between International Marketing Channels and the Environment
8.5 Selecting International Exchange Partners
8.6 International Exchange Relationships: Successes and Failures
8.7 International versus Domestic Channel Relationships: Some Perspective
8.8 Key Terms
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Learning Summary
Channels firms enter risky waters when they develop international exchange
relationships. Still, more firms than ever before are engaging in international trade.
The primary reasons for seeking membership in international exchange relationships
are to: facilitate market entry, boost market share while gaining synergistic ad-
vantages, introduce new products through existing channels, improve service
performance, or respond and adapt to changing local market conditions.
International channel arrangements can be characterised in many ways. The term
international merely suggests something is occurring between nations. Those firms
operating in different countries are generally called multinational corporations.
Several categories of international exchange relationships exist. The first is multi-
national exchange relationships (MERs). MERs occur between trading partners that
operate in foreign markets as if they were local concerns. MERs offer international
marketers an opportunity to engage in what might be described as a series of
domestic strategies executed in foreign markets or countries. MERs are based on
one exchange partners ability to effectively adapt to the environmental circum-
stances and opportunities prevailing in a market of interest. Each MER is
customised to satisfy the needs or master special environmental conditions associat-
ed with a foreign market. Transnational exchange relationships (TERs) also exist.
Rather than engaging in a country-by-country adaptation, TERs approach interna-
tional relationships from a regional perspective. TERs follow channel strategies
tailored to the requirements of entire market regions. While TERs generally involve
fewer exchange partners than do MERs, these partners are usually much larger in
scope. Global exchange relationships (GERs) are a third category. GERs involve
essentially boundaryless relationships among exchange partners. GERs do not
develop on the basis of markets; instead they result from the pursuit of strategic
alignments. Strategic alignments exist when there is an agreement or shared consen-
sus between the organisational visions of two or more exchange partners. GERs
require the highest levels of integration among international partners.
Entry-level international exchange relationships can assume many forms. For
simplicity, we classify these entry modes into two opposing categories: direct and
indirect methods. The direct method is one in which the exchange partner takes a
membership position in the home country or region. A membership position
implies that the exchange partner actually becomes a player in the foreign economy.
When indirect entry is used, the channel member manages the distribution of
products in a target country through foreign designates. A foreign designate is any
intermediary that facilitates the distribution of domestically produced goods through
some foreign target market.
The repercussions of the macroenvironment are acute in international channel
relationships. No formula exists for dealing with the complexity of international
exchange relationships. It is nevertheless important to evaluate environmental
conditions before an international channel relationship is consummated. These
environmental conditions fit into five basic categories: economic, political/legal,
sociocultural, technological, and physical/geographical factors. Unforeseen changes

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in economic cycles, monetary policy, and interest rates always influence channel
performance. Unfavourable economic factors often lead to the termination of
international relationships. The extent to which the political or legal systems of a
host nation promote or repress foreign investment in its local economy dramatically
influences international channel environments.
The beliefs, values and lifestyles that prevail in a target nation should be evaluat-
ed when international marketing channels are developed and executed. To develop
successful international relationships, prospective partners must adapt to any
cultural idiosyncrasies present in their new channel role expectations. By being
sensitive to these socially and culturally based differences in international market-
places, exchange partners can better cultivate long-term relationships.
Technological advances are leading to more efficient use of raw materials, im-
proved manufacturing productivity, and superior product quality in all marketing
channels. Changes in technology also influence how channel transactions are
conducted. The topographic layout, natural resources, regional climates, and weather
patterns of a target-country also affects the exchange relationships consummated
The process by which international partners are chosen warrants special atten-
tion. The overriding goal in selecting international partners should be to identify
opportunities to develop and secure strategic alignments. When prospective partners
pursue conflicting goals, the relationship is unlikely to flourish. International
channel environments are dynamic, and in many instances significant environment
circumstances lie beyond the control of either partner. The process of selection,
then, may be best approached as a refinement process. Several rudimentary factors
should be evaluated in this process. We call these factors the Five Cs: costs, coordi-
nation, coverage, control, and cooperation.
Three types of costs are germane. The first is initial costs involving outlays asso-
ciated with setting up a marketing channel. Preservation costs address the forecasted
expenses of maintaining an exchange relationship. Finally, logistics costs reflect the
expenses related to transporting goods and managing inventories. The coordination
factor requires that prospective partners estimate how the necessary functional
operations will be allocated among the channel participants. The territorial coverage
that a prospective exchange partner is able to comfortably handle needs to be
determined and agreed upon, as well. A realistic assessment of how much effort will
be required by each partner to ensure customer satisfaction should also be launched.
Exchange partners likewise need to negotiate who will have control over key
channel resources. Issues of cooperation remain an important consideration in this
selection process. Cooperation is essential to attain strategic alignment in the
prospective relationship.
Failures in international relationships usually result from a breakdown in how one
or more of the following issues are handled: differing expectations among exchange
partners, slow reactions to changing market conditions, clashes in exchange part-
ners corporate cultures, or prematurely developed international exchange

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While international relationships are risky and difficult to administer, they still
offer great promise. International relationships help channels partners to: address
current gaps in a markets needs or wants, optimise their manufacturing and
distribution capabilities, share the risks associated with entering new markets,
facilitate new product innovation, gain and then exploit economies of scale, or
extend the market scope of their existing operations.

9. Channel Climate

Learning Objectives
After reading this module, you should be able to:
Discuss the role that channel climate plays in establishing and maintaining
exchange relationships.
Describe the processes contributing to cooperation and coordination within
marketing channels.
Distinguish between the roles of power and dependence within marketing
Explain ways in which conflict in marketing channels may be resolved.
Distinguish between the various compliance techniques in channel relationships.
Understand the relationship-building process in marketing channels.

9.1 Channel Climate: When Relationships Get Heated
9.2 Important Channel Climate Behaviours
9.3 Achieving Cooperative Channel Climates
9.4 Conflict Resolution and Channel Climate
9.5 Compliance Techniques
9.6 Relationship Building in Marketing Channels
9.7 Nurturing Channel Relationships
9.8 Improving Channel Performance through Cooperation
9.9 Key Terms

Learning Summary
Going it alone in business is difficult at best, implying that participation in channel
relationships is the best way to go for most marketers. Still, conflict is likely between
channel intermediaries. Much of the opportunity to remediate such conflicts lies
within a channels climate. This sense of a climate emerges from the naturally
occurring interactions of the various boundary personnel who represent the firms
operating within the channel.
Channel climate may be defined as the bundle of characteristics of the channel
organisation reflected in the descriptions channel members give of the policies,
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practices, and consideration that exist in their channel environment. Consideration

is behaviour that reflects mutual respect, trust, support, friendship, and a concern
for the welfare of channel partners. Workable relationships with channel partners
are a critical asset for any channel member. A cooperative climate is reflected in the
members willingness to work or act together in pursuit of some common purpose.
A coordinated climate is evident when the members are working or acting together
in a harmonious or synchronised fashion. The pursuit of interfirm cooperation and
coordination represents a strategic response to conditions of uncertainty and
Conflicts occur when channel members sense that the behaviour of their coun-
terpart is impeding their attainment of goals or effective performance. Power is the
ability of one member of a channel to evoke a change in another members behav-
iour. The dependence of any member reflects a power-submission dimension
dependence represents the relative power a manufacturer can bring to bear as it
attempts to persuade a distributor to contribute to its objectives. Power and
dependence exist as complementary concepts; power results from and strengthens
the dependence of one party upon another within a dyadic relationship. Conflict can
be handled in ways that lead to constructive outcomes. Behaviourally oriented
conflict resolution strategies can be divided into four distinct processes: problem
solving, persuasion, bargaining, and politics.
The goal of most intrachannel influence attempts is to adjust the target firms or
persons behaviour in directions that comply with the source (i.e., influencing) firms
or persons desires. These intrachannel influence attempts generally involve efforts
to alter the targets perceptions of the desirability of the intended behaviour. Seeking
the compliance of a channel member through altering the targets perceptions
regarding the desirability of the intended outcome is appropriate when the behav-
iour in question is related to a goal shared among the channel partners. The pursuit
of intrachannel compliance should begin with the process of building rapport within
the channel climate. Once rapport is established or attempts to do so are well under
way, several interfirm compliance strategies are available for use. Two of the more
common strategies are information exchange and recommendations. Compliance
strategies not based on changing target perceptions of the inherent desirability of
the intended behavioural response are also available. These include requests,
promises, and threats strategies.
Higher-performing channels generally see exchange processes as part of building
a long-term relationship, while lower-performing channels are more likely to view
exchange as a discrete or one-time act. The process of building relationships within
marketing channels consists of four basic stages: awareness, exploration, expansion,
and commitment. Channel relationships often fail to develop because too little
attention is paid to matching expectations between channel partners. Future or
current partners must understand each others goals, as those goals relate to the

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10. Conflict Resolution Strategies

Learning Objectives
After reading this module, you should be able to:
Define negotiation and describe how it can be used to turn conflict into positive
channel outcomes.
Describe several negotiation strategies, and when and how they should be used
to resolve channel conflict.
Discuss how problem-solving strategies can be used in channel settings.
Understand how persuasive mechanisms operate in channel relationships.
Understand when legalistic strategies should be used to resolve channel conflicts.
Describe how channel climate can be shaped to influence the types of conflict
resolution strategies used in marketing channels.
Attempts to unilaterally apply power usually fail in todays marketing channels. In
todays competitive, information-driven, and globally accessible marketing channels,
coercion is no longer a viable management alternative. Successful channel leaders
are changing the nature and meaning of power and how it is employed to settle
conflicts. Time Out 10.1 discusses one of the things it takes for success and for
successfully resolving conflicts in todays channel relationships: trust. In this
module, we expand on the discussion about conflict resolution that we began in
Module 9 by looking at the various ways channel partners can resolve their conflicts.
Conflict resolution strategies can be divided into five broad types, each of which will
be discussed in detail: negotiation, problem-solving strategies, persuasive mecha-
nisms, legalistic strategies, and climate management. To complete the discussion, we
will introduce the concept of interdependence, the dimension of conflict resolution
that ties all of these strategies together.

10.1 Negotiation: The Art of Give and Take
10.2 Problem-Solving Strategies
10.3 Persuasive Mechanisms
10.4 Legalistic Strategies
10.5 Taking the Long View: Managing Conflict through Managing Channel Climate
10.6 Interdependence: Tying It All Together
10.7 Key Terms

Learning Summary
Conflict resolution strategies can be divided into five broad types: negotiation,
problem-solving strategies, persuasive mechanisms, legalistic strategies, and climate
The success with which channel conflicts are resolved often depends upon nego-
tiation. Negotiation involves mutual discussions aimed at resolving conflict. It is a

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fact of marketing life that should be mastered rather than feared. Boundary person-
nel should continuously consider the impact that their negotiating strategies will
have on channel relationships. Negotiating strategies should not be selected until
after channel members have evaluated what they seek for their relationships future.
Channel members that use predatory negotiation strategies would consider the
idea of relationship-sustaining bargaining sessions unsophisticated or weak. Predato-
ry negotiators try to grab as much as possible by giving the other as little as possible.
Channel members who are willing to lose, conceal information, or stand by com-
mitments to accept only favourable settlements generally prevail. By contrast,
symbiotic negotiation strategies feature attempts to create mutual value through a
process of trade-offs and bargaining. The prevailing atmosphere is, I will help you if
you help me. Open submission strategies involve one channel members conces-
sions to another on all but the barest aspects of the issue in conflict. Such actions
might be taken to build a more productive relationship. Joint gains can be achieved
through win-win strategies. Here, participants seek to avoid behaviours that would
worsen their relationship. Behaviours that would increase the substantive elements
of the issue under negotiation are actively sought out.
Channel parties should base their negotiations on substance. This involves (1)
separating people from problems, (2) focusing on needs rather than positions, (3)
developing options for mutual gains, and (4) using objective criteria. Symbiotic
strategies designed to create mutual value through cooperation and collaboration are
diametrically opposed to predatory strategies intended to claim value. Using
negotiating strategies for claiming value generally blocks its creation and makes one
susceptible to predatory negotiation strategies. When attempting to resolve conflicts
through negotiation, each party should do their homework, deal from the top of the
deck, remember that quitters never win and the importance of a positive attitude,
and strive to build bridges rather than walls.
Problems routinely arise in channels. A problem-solving strategy is a plan of
action based on a channel members goals or objectives and its analysis of the
situation. One problem-solving strategy is logrolling, in which each party identifies
its priorities and offers concessions on those issues they view as less significant.
Another involves compromise, wherein conflicts are resolved by establishing a
middle ground based on the initial positions of each party. A third problem-solving
strategy involves aggressive, one-sided attempts to solve problems by threats,
persuasive arguments, or punishments.
Once negotiation and problem-solving efforts establish open lines of communi-
cation, the real process of conflict resolution can begin. Much of that work involves
persuasion. The act of persuasion implies that one channel member has influenced
another members behaviour, with those behaviours relating to a course of action
sought by the persuader. But persuasion is not something one channel member does
to other channel members. Persuasion is done with others. It involves a cooperative
effort, and a process of give and take.
Arbitration and settlements are legalistic strategies aimed at gaining compliance
or a solution to an otherwise unresolvable problem. Either method should only be
used as a final option. Their use suggests that a solution to the problem could not be
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worked out through other, more harmonious procedures administered through

normal marketing channels.
Serious disputes in channel relationships usually do not pop up overnight. Mind-
ful of this, marketers should try to adopt long-run views of how best to handle
conflict in channel settings. Perhaps the best way to achieve this is by shaping the
channel climate in ways that contribute to the development of trust between the
channel members. The use of positive problem-solving and persuasion behaviours is
then much more likely.

11. Information Systems and Relationship Logistics

Learning Objectives
After reading this module, you should be able to:
Explain how systematising information can enhance channel performance.
Define logistics and apply the concept to channel management.
Describe how information and logistics interface with channel management.
Explain how tailored logistics and supply chain management can foster relation-
Identify the principal inputs and outputs in the logistics system.
Relate the five logistics mediators to customer satisfaction.
Discuss major trends in transportation and inventory management.
List the logistics challenges which accompany global distribution.
In logistics each exchange partners actions are characterised by:
Information Flows. Information drives channel systems. Information flows
between channel members must be effectively coordinated.
Control from a Distance. Channel members usually cannot personally deliver
goods to each of their customers. Channel members often delegate the responsi-
bility for physical distribution to other organisations. Still, ideally, channel
members maintain some control over product quality and service.
Integrated System. Logistics involves an integrated process. Logistics merges
technological, transportation, communication, and information management
tools to foster the efficient flows of goods through marketing channels.
Information is an essential element in the exchange process. In this module, we
will study how information is moved through channel systems and how it relates to
logistics management. This process of moving information is known as systematis-
ing information. Systematised information involves any rule-based method used to
arrange, coordinate, or share data between members of a distribution channel.
Systematised information is a cornerstone of logistics.
To appreciate the role of systematising information, consider how a clothing
manufacturer knows what types and sizes of blue jeans to supply to a particular

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retail store. The answer? It receives systematised information about consumer

clothing preferences from the retailer. For example, major suppliers of apparel to
retailers like Macys or Selfridges automatically refill stock to these stores as it is
sold. No restocking orders, no approvals, and no guesswork are required in this
replenishing process. The need to purchase new stock is transmitted directly to the
manufacturers from the retailers computerised cash registers.
Manufacturers, suppliers, and retailers are increasingly sharing information to
create competitive advantages in the marketplace. The relationship between Macys
and its suppliers shows how such advantages might arise in vertical channel systems.
Systematised information can also occur horizontally that is, at the same channel
level. For example, car manufacturers are increasingly sharing information to gain
competitive advantage through product innovation, market expansion, reduced
costs and other gains. The CRM shows how and why information is a key inter-
change in any channel relationship. Firms simply cannot successfully meet the
challenges of a dynamic external environment without continued flows of accurate

11.1 Logistics
11.2 Logistics and Channel Management
11.3 Relationship Logistics Model
11.4 Logistics Inputs
11.5 Logistics Mediators
11.6 Logistics Outputs
11.7 Key Terms

Learning Summary
Imagining distribution channels without considering the critical role of information
is difficult. Systematising information involves any rule-based method used to
arrange, coordinate, or share data between members of a distribution channel.
Systematised information is a cornerstone of logistics. Firms cannot successfully
meet the challenges of a dynamic external environment without continued flows of
accurate information.
Logistics management involves the process of planning, implementing, and con-
trolling the efficient, cost-effective flow and storage of raw materials, in-process
inventory, finished goods, and related information from point-of-origin to point-of-
consumption. These actions are performed so that channel members can transform
their market offerings in ways that match customer requirements. Information
drives the flow of goods and services through channels; it allows channel members
to maintain or achieve control from a distance. Logistics help a firm tailor its efforts
to satisfy continually changing customer needs. Logistics also help a firm create
competitive advantage.
No single measure can efficiently assess the effectiveness of a firms logistics
programme. Isolating the costs and returns associated with the flows of goods

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through channels is quite difficult. Profitability is a common performance measure.

Many yardsticks are emerging as tools for evaluating logistics performance. One
such measure is customer responsiveness, or a channel members ability to adapt to
its partners changing needs and service requirements. A four-step process
consisting of external and internal audits, evaluating customer perceptions, and the
identification of opportunities to establish competitive advantages is available for
identifying customers service needs.
Logistics systems are frequently described in terms of delivering the right product
to the right place at the right time in the right condition for the right cost. This sense of
rights connects customer responsiveness to each level of the marketing channel for
any product or service offering.
Logistics strategies are now adopting a longer-run orientation in their efforts to
secure greater market coverage, customer satisfaction, product customisation, and
cost containment. A variety of logistics activities promotes customer satisfaction as
goods move toward their point of consumption. These activities range from
resource procurement to the management of returned goods. Supply chain man-
agement (SCM) is a cooperative approach aimed at maximising logistical outputs
while simultaneously minimising logistical inputs. Properly executed supply chain
management produces value at each logistics system level. The notion of supply
chain management rests on channel integration. Channel integration involves
systematising information to reduce suppliers and retailers inventory needs.
Manufacturers are usually more certain about the resource inputs they need because
their production schedules operate on real time. SCM can also reduce stock-outs
(that is, running out of merchandise for which demand exists).
Supply chain management focuses attention on the need to develop relational
rather than transactional exchange in logistics systems. Effective supply chain
management tends to forge cooperative efforts outside the traditional boundaries of
channel settings. These cooperative efforts might include market research, product
engineering, and total system designs. For supply chain management to foster better
retailervendor and retailmanufacturer relationships, partnerships must address
matters extending beyond the distribution and handling of inventories.
The Relationship Logistics Model (RLM) shows how systematised information
and logistics relate. The RLM has five components: logistics goals, systematised
information, logistics inputs, logistics mediators, and logistics outputs. Logistics
goals and systematised information have already been discussed. Logistics inputs are
the human and capital investments in the flows of goods and services through the
marketing channel. These include natural resources, human resources, and financial
A wide variety of logistics mediators impact the flows of goods and services in a
distribution channel. The major categories of logistics functions that contribute to
efficient, cost-effective flows through distribution channels are discussed in the
module. These activities can be grouped into inventory management, transportation,
warehousing, purchasing, and packaging categories. Inventory management is aimed
at minimising inventory carrying costs while ensuring that sufficient stock is
maintained to satisfy customer needs. Electronic data interchange (EDI) facilitates
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information exchange between channel members. EDI involves the paperless

transmission of information including sales data, purchase orders, invoices,
shipment tracking data, and product return information between manufacturers,
suppliers, and retailers. EDIs use signals a shared commitment toward the efficient
management of inventory throughout a channel.
The physical movement of goods from one location to any other destination is
called transportation. Transportation accounts for a substantial portion of logistics
cost for most firms. There is a saying that, If you arent managing your transporta-
tion, you arent managing your supply chain. Warehousing is another important
influence on logistics costs. Warehousing involves the physical storage or stock-
keeping of raw materials, product components, and/or finished goods. Warehouses
perform three functions: movement of goods, component parts, or raw materials;
materials handling; and storage. Purchasing links buyers and sellers at each channel.
Purchasing involves forecasting demand, selecting suppliers (also known as sourc-
ing), and processing orders. Packaging refers to the materials used to encase
materials or products while in transit. Packaging can optimise logistics efficiency and
effectiveness by reducing weight and space requirements, ensuring product quality,
and selling the product.
Three primary outputs are associated with logistics systems. The first is a compet-
itive advantage. The second output is known as efficiency. Finally, logistics systems
are responsible for the most important output of all: a satisfied customer.

12. Cultivating Positive Channel Relationships

Learning Objectives
After reading this module, you should be able to:
Understand the recruiting process within market channels and identify the
market, product, and firm factors considered.
Describe the screening process and the selection criteria considered in the
selection of channel members.
Discuss the special measures that are often necessary to motivate independent
intermediaries to support the best interests of their suppliers.
Describe how recruiters can secure the success of new channel memberships.
In general, successful marketing channels are characterised by a nurturing or
supportive environment and a suitable match between what each channel member
needs and is capable of providing to the channel system. Corporations sometimes
must sublimate portions of their skills to the good of the channel system. Thus,
organisations like Roadway Logistics should ship or store component or finished
goods if they perform such functions better.

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Synopsis / Marketing Channels

In this module, we will discuss the five steps that are involved in the cultivation
of a positive channel setting: recruiting, screening, selecting, motivating, and
securing. These steps are shown in Exhibit 1.

Exhibit 1 Developing positive channel relationships

12.1 Recruiting and Screening New Prospects
12.2 Selecting the Right Channel Partners
12.3 Motivating New Channel Members
12.4 Securing Recruits for the Long Term
12.5 Appendix 12 Managing Impressions in Channel Relationships
12.6 Key Terms

Learning Summary
Cultivating positive channel relationships is a matter of serious concern. The five
steps that are involved in developing long-term channel relationships are recruiting,
screening, selecting, motivating, and securing.
Recruitment involves those plans and actions aimed at actively soliciting partici-
pation of a new channel member. When recruiting prospective channel partners, the
recruiting organisation should consider how its needs relate to the prospects
qualifications and needs, and vice versa; communicate honestly about the con-
straints and realities of the channel role; and learn all it can about the prospects
expectations and be prepared to fulfil them.
Not every firm that is recruited is eventually selected for channel membership. In
fact, most firms are screened out as inappropriate candidates. Screening is an
inherently negative process in that recruiting organisations are seeking reasons to
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reject rather than accept prospective partners. When screening prospective channel
members, recruiters should consider their market segments and products, fit the
prospects strengths and competencies into their products life cycle, remember that
bigger is not always better, and consider the support that is likely to be required by
the various prospects.
Once prospects have been recruited and screened, the right partner is selected
from among this smaller pool. Various criteria should be considered during this final
evaluation of channel member prospects, including sales factors, product factors,
experience factors, administrative factors, and risk factors. Distribution functions,
service functions, intelligence-gathering functions, and quality of relationships
should also be considered as new channel partners are selected.
Recruiting organisations usually have only limited control over their independent
intermediaries after they come on board the channel. Special measures including
Distributor Advisory Councils, personal contact, assurances of future relationships,
threats, and/or the provision of adequate support are often required to motivate
partners to act in the recruiting organisations best interests.
Finally, securing recruits for a positive, long-term relationship requires develop-
ing a partnership between the channel partners. Boundary personnel must be able to
identify and respond to their new partners unique needs and problems. One way to
do this is to recognise that, just as any other living thing, relationships pass through
a life cycle of birth, growth and maturity, and death. Each stage has different needs
and effects on the relationship. In the end, a relationship is what the two parties
make of it. The two primary factors are the total package of benefits the partners
achieve from it and the level of customer service involved.

13. Transaction Costs in Marketing Channels

Learning Objectives
After reading this module, you should be able to:
Discuss the continuity of exchange processes.
Critically assess the assumptions of an input-combiner orientation in deriving
exchange value.
Explain why transaction cost economics (TCE) provides a more realistic account
of the economics of exchange than does a production orientation.
Discuss how resource scarcity affects transaction flows.
Understand how transaction costs impact channel members market versus
hierarchy decision.
Identify the importance of transaction-specific assets in channel dependency.
Interpret the types of exchange relationships that result from transaction cost

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Exchange processes lie at the heart of the Channel Relationship Model. An ex-
change process is the mechanism that connects channel members. This
connection allows resources to be pooled and risks to be assessed in the channel
members pursuit of achieving collective goals. When considering the exchange
process, it is worth bearing in mind that 1) a single process can generate a number
of outcomes, 2) the natural course of an exchange is affected by the environment in
which it occurs, and 3) a process can persist either indefinitely or only until some
specified condition is met.
In Part 4, we will look at the economics of exchanges in some detail, beginning in
this module with transaction costs, the economic cornerstone on which channel
member exchanges are based. Our discussion begins with a brief look at the
conditions that must be in place for an exchange to occur, then an overview of the
types of value that can be derived from channel exchange. Next, we introduce the
concept of transaction costs as they relate to exchange partnerships and explore the
problems and pitfalls of transaction cost analysis (TCA). Finally, we take a brief look
at four types of economic exchange relationships. In Chapters 14 and 15 we will
discuss two special types of exchange relationships: vertical marketing systems and

13.1 Conditions for Exchange
13.2 Factors in Deriving Economic Value
13.3 Cooperation versus Opportunity Costs
13.4 Transaction Cost Analysis
13.5 Transaction Cost Analysis: Problems and Limitations
13.6 Economic Exchange Relationships
13.7 Key Terms

Learning Summary
Exchange processes can persist indefinitely or until some specified condition is met.
The natural course of an exchange is affected by the environmental conditions in
which it occurs. Each exchange transaction thus differs from all other transactions.
For exchange to occur in marketing channels, each party must possess goal prefer-
ences, anticipate the outcomes of the exchange, direct its actions toward goal
preferences, and be willing to create or accept new behaviours to facilitate attain-
ment of those goals.
Value is a quantifiable assessment of the costs and benefits jointly derived from
the offering and the exchange process itself. Various types of value can be derived
from channel exchange. Exchange value and value relationships change over time.
This is why exchange inputs are valued relative to how, when, and where they are
obtained. Scarcity also affects the costs of goods and services. The demand for
products strongly influences the valuation of outputs. The success of channel
members depends in no small measure on their ability to prepare for exchange and
adapt to unanticipated changes in supply and demand. Channel members can

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estimate value based on: primacy of the exchange, vicarious role-taking, transaction
regularity, and subjective probability.
Firms cannot exist without markets, nor can markets exist without firms. Firms
and markets thus share a common purpose. The sense of cooperation deriving from
this shared purpose implies that each channel members willingness to assist the
other should produce an outcome that neither can attain individually. But channel
members also incur opportunity costs embodied by resources which must be
surrendered to gain something else in their efforts to maximise exchange value.
Opportunity costs provide the backbone of a concept known as transaction cost
analysis (TCA). TCA suggests that firms should pursue the most cost-efficient
channel arrangements based on cost avoidance. As avoiders, firms constantly try to
minimise the costs of market exchanges.
Transaction costs involve all expenses resulting from the negotiating, monitoring,
and enforcing activities that are necessary for firms to accomplish their distribution
tasks through exchange. Transaction costs also involve the cost of arranging,
monitoring, and enforcing contracts. Transaction costs occur whenever firms
transfer title of economic assets and enforce their exclusive rights to those assets. In
a general sense, transaction costs are simply opportunity costs that feature both
fixed and variable components.
Firms can seek to build relationships and channel transactions outside the firm,
that is, in the market setting. Transactions can also occur within the firm, that is,
within the hierarchy. According to traditional economic theory, firms should expand
internally until the marginal cost of an extra transaction outweighs the cost of
market exchange. TCA relates to channel design decisions in those circumstances
where, for example, a manufacturer performs all distribution tasks for itself through
vertical integration as opposed to using one or more intermediaries to perform
some or most distribution tasks.
Three conditions must be present for firms to choose hierarchy over market.
These conditions are: 1) a high level of environmental uncertainty must exist in the
transaction cost assessment; 2) the assets involved must be highly specialised and
unique to the exchange process; and 3) the transaction must occur frequently.
Either directly or indirectly, channel members transaction costs always relate to
information procurement. Exchange information is material knowledge that affects
the behaviours, experiences, and outcomes associated with an exchange. The types
of information costs that channel members must account for include commodity
and labour inputs, market behaviour costs, pricing data, monitoring and enforce-
ment agreements, and costs relating to efforts aimed at protecting property rights.
Transaction cost analysis hardly offers channel members a panacea, plagued as it
is by certain limitations. These limitations frequently relate to the complexity of
exchange, which in turn can relate to the nature of the product, firm, or market
involved in the transaction. The complexity of an exchange makes isolating the
particular costs and benefits associated with it difficult to assess. At other times, one
or both exchange partners fail to act rationally, or pursue opportunistic outcomes.
Each behaviour poses another obstacle undermining the accurate assessment of

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transaction costs. Opportunism involves a situation where information is dissemi-

nated with the intention of disguising ones true purpose, or otherwise misleading
ones exchange partner. TCA assumes that opportunism is likely to arise in channel
settings. This is a primary reason why TCA theorists suggest firms should use
vertical integration rather than the market when developing channel systems.
Channel members also operate in unpredictable environments. For this reason,
transaction costs are often speculative or based on imperfect information. Another
potential problem area is the number of firms in the industry. Oligopolies tend to
limit transaction costs because of the limited number of exchange alternatives. Also,
the impact that data have on a transaction complicates the situation.
Asset specificity encompasses the value of capital and other resources unique to a
particular exchange. Transaction-specific assets hold little or no value outside of the
explicit exchange between channel members. This is why exchange participants tend
to quickly become dependent upon one another. Several types of transaction-
specific assets come into play in an exchange. These include specific site assets,
specific human assets, brand capital, and time specificity.

14. Vertical Marketing Systems

Learning Objectives
After reading this module, you should be able to:
Discuss why channel structures are best designed one building block at a time.
Describe the parameters associated with the vertical integration decision.
Describe the channel options available within administered, contractual, and
corporate vertical marketing systems.
Understand when a corporate, administered, or contractual vertical marketing
system should be used.
Describe when a business organisation should or should not vertically integrate.
Discuss when corporate vertical marketing systems should or should not be
Define value-adding partnerships.
Describe how to improve channel relationships through the use of traditional
vertical channel designs.
In the process of building channels, marketing and distribution functions can (and
should) be fit together in logical, sturdy, and creative ways. In this module, we will
discuss the process of building channels through vertical integration. First, we will
explore the three traditional types of vertical marketing systems administered,
contractual, and corporate along with when each type should be used. We will
then look at two new concepts in vertical integration, value-adding partnerships and
the concept of treating every product as a service. Before we introduce vertical
integration, lets review why firms build channels in the first place.

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14.1 Building Channels
14.2 When Should Organisations Vertically Integrate?
14.3 Value-Adding Partnerships: Beyond Vertical Marketing Systems
14.4 Key Terms

Learning Summary
Rather than trying to go it alone in a distribution setting, almost all marketing
organisations are better off affixing themselves to one or more partners. These
partners can be independently operated or managed as a single corporate system.
Probably the most important distribution decision faced by manufacturers or
retailers is whether they can perform any or all of these channel functions more
efficiently and effectively through the use of intermediaries or through vertical
integration. From the manufacturers perspective, a vertical integration decision
relates to whether the firm should establish its own sales branches and warehouse
facilities, or, in some instances, its own retailing units. The two primary reasons why
firms vertically integrate are cost reduction and environmental control.
Vertical marketing systems (VMSs) have emerged in recent years to challenge the
dominance of conventional marketing channels. VMSs consist of a producer(s),
wholesaler(s), and retailer(s) acting together as a unified system. In a VMS, one
channel member either owns the others, franchises the others, or has so much
legitimate or contractual power that the other firms cooperate.
The three types of VMSs are administered, contractual, and corporate. An admin-
istered VMS is a conventional marketing channel characterised by highly effective
interorganisational management. Contractual VMSs consist of independent firms
operating at different channel levels that integrate their distribution agendas on a
contractual basis. These formal contracts are intended to secure greater economies
of scale and market impact than any member could achieve alone. Two popular
non-franchising types of contractual VMSs are retailer-sponsored cooperative
organisations and wholesaler-sponsored voluntary organisations. Corporate VMSs
combine two or more stages of production and distribution (including end-user
distribution facilities such as retailers) under a single corporate ownership. A
corporate VMS is a vertically integrated channel system. Corporate VMSs are used
by organisations that seek high levels of control over their channel functions.
Within a VMS, an entire channel is linked together as a single unit of competi-
tion. This directly contrasts with conventional channels, where independent
members often assume that their competitive advantages result strictly from actions
taken at their channel level. The development of VMSs often provides an effective
strategic option for organisations that are struggling in competitive markets.
When a manufacturer owns and operates wholesaling and/or retailing units, the
VMS is forward integrated. When retailers or wholesalers operate manufacturing
facilities, a backward-integrated VMS exists. No firm operates a complete corporate
VMS from raw material to the final users doorstep across all distribution
functions. A completely vertically integrated firm is inevitably afflicted with dise-
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conomies because each channel activity cannot achieve minimum average cost
The make-or-buy issue lies at the heart of the vertical integration decision. As-
suming that the firm in question has adequate power and size, vertical integration
has historically been shown to be the likely response in marketing channels facing
intense competition, resource scarcity, and variable demand. But the make-or-buy
decision in marketing channels remains complicated and potentially hazardous. For
one thing, because the vertically integrated unit has a captive source of supply or
demand, normal incentives to perform efficiently within the channel can be dulled.
The cumulative result of these inefficiencies is called control loss or those losses
resulting from employee behaviours within vertically integrated systems that are not
consistent with the firms overall profit-maximisation objectives.
The classic American view of vertical integration throughout distribution chan-
nels has focused on ownership. But the ability to fashion successful distribution
alliances among firms, as opposed to engaging in outright ownership, is likely to
prove a critical determinant of success in the years ahead. The Japanese have long
practiced a form of vertical integration that works through ongoing association and
minimal ownership responsibility. This is known as soft vertical integration.
Value-adding partnerships (VAPs) involve a set of autonomous companies that
work closely together to manage the flow of materials, goods, and services along an
entire value-added chain. The term value-added chain describes the processes and
activities occurring at the various steps that a good or service passes through from
the raw material stage to the point of consumption. VAPs are quickly gaining favour
throughout the global economy. Each company in a VAP should cultivate relation-
ships with only a few suppliers of critical materials, finished goods, and/or
customers. For VAP partners to help one another, they must set up effective ways
to share information. Having too many partners effectively precludes this oppor-
tunity. Too many partners also means too few repeat transactions and less
opportunity for close relationships and other efficiencies to develop. At the same
time, partners should avoid becoming overly dependent on too few relationships.
Each smaller company or unit operating within a VAP focuses on performing just
one step or channel function within the value-added chain.
For a VAP to sustain itself, the partners must adopt and follow a set of ground
rules that facilitate trustworthy transactions. Despite the many uncertainties and
opportunities for gamesmanship existing in any channel environment, a sense of
partnership must somehow become an enforceable reality. VAP partnerships can be
more easily sustained when each partner decides they will: (1) not be the first
member to play games, (2) reciprocate with both cooperation and the lack of it, (3)
not be too greedy, and (4) not be too clever and try to outsmart its partner.
Another new view of vertical relationship between manufacturers, resellers, and
customers is emerging. This new view requires that organisations think of every
product as a service. Each organisation should look at what the product in question
does, rather than what it is. Once that perspective is adopted, the task of marketing
the product to the next channel level becomes only one of the organisations
opportunities to do something extra for its customers. This leads to a sense of
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bundling, where a desirable collection of benefits is spliced together to pursue or

sustain a preferred customer relationship. Moreover, once an organisation views a
product as a service, a willingness to contract out channel functions emerges. This
process is known as unbundling, and can lead to natural efficiencies within market-
ing channels.

15. Franchising: A Global Trend

Learning Objectives
After reading this module, you should be able to:
Define franchising, franchising relationships, franchisers, and franchisees in
vertical marketing systems.
Discuss the benefits franchisers and franchisees receive from the franchising
Discuss the primary concerns of franchisers and franchisees.
Describe the current domestic and global trends in franchising channels.
Explain the processes in deciding whether to join a franchising system.
List and describe the potential sources of conflict in franchising channels.
Provide an overview of the current legal and ethical standards in franchising
Understand the methods used to resolve franchising channel conflicts.
Discuss the future direction of franchising.
In this module, we will look closely at the contractual vertical marketing system
known as franchising. We have singled this type of vertical marketing system out for
extra attention because franchises are an increasingly important part of the econo-
my. Franchising is growing on a global scale. First we will discuss the franchising
relationship as a whole, and the various types and benefits of franchising. We will
then consider relevant franchising and environmental trends, sources of franchising
conflict, and current legal standards in franchising. The module closes with a
discussion of how to make franchise relationships work and of some predictions
about the future of franchising.

15.1 Franchising Systems
15.2 Relevant Trends in the Franchising Environment
15.3 Internal Environmental Factors
15.4 Conflict in Franchising
15.5 Current Legal Standards in Franchising
15.6 Making Franchise Relationships Work
15.7 Whats in Franchisings Future?
15.8 Key Terms
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Synopsis / Marketing Channels

Learning Summary
Franchising involves a contractually based, continuing channel relationship in which
a franchiser provides a licensed privilege to do business in a specified area plus
assistance in organising, training, merchandising and management in return for a
consideration from the franchisee. This consideration usually takes the form of
start-up fees, continuing royalty fees, and the franchisees agreement to abide by the
constraints of the franchising contract. Franchising relationships actually consist of
three relationships: legal, business, and a relationally oriented association between
the franchiser and franchisee.
Franchising provides opportunities for all parties involved in the channel rela-
tionship. For the franchiser, franchising offers an alternative to developing a
company-owned chain, vertical market expansion financed essentially through
externally sourced franchisee funds, and a highly motivated channel management
team. For the franchisee, franchising provides an alternative to independent
operation, proven products/services/concepts and operating procedures, and an
established brand/image that creates instant credibility and attractiveness in the
Two forms of franchising arrangements predominate. In one form, known as
product/trademark franchising, franchisees distribute a product under a franchisers
trademark. Automotive dealerships are a good example. In the other, known as the
business format franchise, franchisees replicate a complete business concept,
including product or service, trademark, and methods of operation, in their own
communities. The fast-food industry provides numerous examples. The specific
prototypes of these broad formats are being altered to adapt to the changing
demands of todays marketplace.
Franchisees are deeply concerned with profits. They are likewise concerned with
the possibility of losing their business at the end of the contractual period, franchis-
er expansion in their territories, and getting requisite returns for the royalty fees and
promotional payments to their franchiser. Franchisers are also deeply concerned
with profits. They are also concerned with whether franchisees honour their
contractual agreements in the areas of purchasing, operating procedures, and
income reporting.
Franchising is affected by environmental changes, which present both challenges
and opportunities to the industry. One of the strengths of the franchising channel
form is that it can change to rapidly accommodate the changing consumer and
industry needs that emerge as a consequence of social/cultural/demographic,
economic, international, and industry changes.
Franchisees tend to be entrepreneurs. Such an orientation contributes to the
probability of an individual franchisees success. Beyond this, prospective fran-
chisees can improve their chances for success if they nail the numbers (in their
franchising contract), measure (franchisers) management, cross-examine current
franchisees, and carefully comb the franchising contract.
Ideally, the interests of franchisers and franchisees are one and the same: the
better franchisees do, the better franchisers do. But life in channels often fails to
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follow the ideal; franchising systems are rife with potential and actual conflicts of
interest. Conflicts frequently arise over the issues of tying agreements, expan-
sion/encroachment, whether termination/renewal clauses are executed capriciously,
and/or whether less than full or accurate disclosure of facts and conditions pertain-
ing to the franchising arrangement has been revealed. After years of relative
inaction, legislators at both the state and federal level are again introducing measures
to address the concerns of both franchisers and franchisees.
To make franchise relationships work, franchisers should ensure that their fran-
chisees are always able to communicate with them and feel part of the franchising
system. Franchisers should make sure their franchisees are aware that they are
appreciated, particularly when their performance merits such consideration. Fran-
chisers should also strive to develop a sense of rapport with their franchisees and
must provide the necessary expertise to them. Beyond these considerations,
franchising is unique among other marketing channel alternatives in that it features a
mechanism to substantially reduce the potential for serious channel conflict the
intelligent contract design. An intelligent contract specifies: the unique roles of each
contracting party, franchiser and franchisee operating procedures as precisely as
possible within the antitrust-based obligations of both parties, how the performance
standards of the franchisee and franchiser will be established and revised, the criteria
that must be met before market or product expansion can occur, and all reasonable
causes that can lead to the franchisers termination of the franchising agreement.
Finally, franchisers should, in most instances, strive to develop a strategic partner-
ship with their franchisees. This end can be achieved by successfully addressing the
following issues: mutual responsibility, communicating up and down the channel,
treating franchisees as customers, and providing leadership and a positive attitude.
Looking toward the future, it is apparent that the franchising industry will con-
tinue to become more diverse. Flexibility will emerge as perhaps the major factor
contributing to or inhibiting the success of future franchising channels. Conversion
franchising will gain speed, particularly within international markets, and US-based
franchises will increasingly look overseas for their future expansion and growth in
profitability. Finally, multiple unit franchising will continue to gain popularity and
strength within the US and international franchising systems.

16. Long-Term Interfirm Relationships

Learning Objectives
After reading this module, you should be able to:
Define the three types of exchange relationships.
Discuss the four elements that are associated with all exchange episodes.
Explain differences between discrete and relational exchange.
Demonstrate how the presence of trust affects behavioural contracts.
Discuss the role that reciprocity plays in social exchange.
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Explain the four stages of channel relationships.

Identify the exchange governance norms that exist in all behavioural contracts.
Apply the basic principles of relational exchange to buyerseller dyads.
In this final section of the book, we will address how shared values, purposes, and
goals can serve as a bridge over troubled water. First, in this module, we will look at
exchange relationships what they are, what they are comprised of, the stages of
channel relationships, and the norms that govern them. In Module 17 we will
explore the emerging role of strategic alliances. Finally, in Module 18, we will close
the book with a discussion of strategic implications for the twenty-first century.

16.1 Exchange Relationships: Bridging Transactions
16.2 Exchange Episodes
16.3 The Discrete-Relational Exchange Continuum
16.4 Stages of Channel Relationships
16.5 Exchange Governance Norms
16.6 Relationship Selling
16.7 Key Terms

Learning Summary
While individual transactions are the economic cornerstone of exchange, they do
not always describe the complex relationships that often emerge between channel
members. Individual transactions may be referred to as exchange episodes. Four
elements are invariably associated with marketing exchange episodes: products and
services, and information, financial, and social exchange. The sum of all the costs
and benefits associated with these exchange episodes is called exchange utility. Each
party to a transaction both gives and receives utility. It is important to differentiate
between exchange episodes and longer-term aspects of exchange.
All transactions range from discrete (or transactional) to relational exchange.
Discrete exchange describes highly impersonal, one-time transactions. In discrete
exchange, there is only minor social exchange with little concern for the possibility
of future interactions. Conversely, relational exchange may be compared to the
behavioural actions and reactions that occur in a successful marriage. It addresses
the long-term, ongoing relationships that develop between exchange partners. More
and more companies are engaging in relational exchange with each other. These
companies are more concerned with sustaining exchange relationships and less
concerned with enforcing the precise terms of an exchange episode. Ongoing
relationships are customised over time to the particular needs associated with each
exchange partner.
On their path to the preferred state of relationalism, relationships move through
four stages: awareness, exploration, expansion, and commitment. The norm of
reciprocity, reflective of the give and take that sometimes develops between exchange
partners, provides the impetus necessary to move from awareness through to the
commitment stage. Reciprocity can be facilitated or inhibited within an exchange
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relationship by the type of communication processes that evolve between channel

members. In autonomous communication strategies, exchange between channel
members is infrequent. This strategy is typically associated with discrete exchange.
By contrast, collaborative communication strategies generally prevail within highly
relational exchange. Collaborative strategies are associated with more frequent
communication and more information sharing. Collaborative strategies are con-
sistent with the cooperative character of relational exchange.
The importance of developing and preserving exchange relationships can be
demonstrated in buyerseller interactions. The relational orientation has become
known as relationship selling. In relationship selling, sellers actively engage custom-
ers as partners. For instance, buyers and sellers might co-design product offerings so
they can each benefit directly from the exchange association.

17. The Role of Strategic Alliances

Learning Objectives
After reading this module, you should be able to:
Define strategic alliances and discuss their impact on the US economy.
List and discuss reasons why channel members form strategic alliances.
Describe the three global alliance strategies, and assess their costs and benefits.
Explain the process by which most alliances are developed.
Discuss why many strategic alliances fail despite their intuitive appeal.

17.1 Strategic Alliances: Definition and Characteristics
17.2 The Nature and Scope of Strategic Alliances
17.3 Types of Strategic Alliances
17.4 Developing Strategic Alliances
17.5 The Downside of Strategic Alliances
17.6 Key Terms

Learning Summary
Channel members are increasingly collaborating as partners. Properly managed
collaboration allows channel members to reduce the duplication of resources and
efforts, while bolstering their collective market strengths. Channel members are also
able to lessen the uncertainty posed by their channel environments by spreading
risks. Collaboration likewise offers channel members the opportunity to achieve
greater efficiency.
The term strategic alliance describes a number of organisational structures in
which two or more channel members cooperate and form a partnership based on
mutual goals. Strategic alliances are also symbiotic relationships interdependent,
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mutually beneficial exchanges between two or more parties. Strategic alliances often
involve an overarching relationship between a series of channel members, each of
which features different core competencies. Regardless of the strategic alliances
shape or size, it is critically important that the strategic partners share common
goals. Strategic alliances often allow cooperating channel members to achieve
favourable competitive positions.
Paradoxically, a state of increased competition among companies has led to a
state of increased cooperation in the form of strategic alliances among compa-
nies. Strategic alliances are profoundly influencing conduct and consumption in
global marketing channels. The rate of domestic alliance formation has been
growing by over 25 per cent annually.
Strategic alliances offer several advantages for their participants, including the
opportunity to open new market channels, reduce wasteful or redundant activities,
lower the risks involved in market and product development, gain market share, and
expand into related and unrelated industries. But the overriding rationale for
strategic alliances lies in their ability to create exchange value and positioning
advantages by combining the complementary strengths of channel members.
Three categories of strategic alliance options predominate. Licensing arrange-
ments revolve around a contractual agreement where one alliance partner makes
intangible assets such as technology, skills, knowledge available to another partner in
exchange for some remunerative consideration. Joint ventures involve the creation
of a new organisational entity by two or more existing firms. These firms then
assume active roles in developing and implementing a marketing strategy for the
joint venture. Consortia are highly integrated, industry-wide coordinated alliance
structures, generally consisting of 10 to 50 firms. Consortia share the risks and
benefits associated with the outcomes of their coordinated activities. Consortia
operations are usually highly specific to a particular industry or technology market.
Prior to entering a strategic alliance, channel members should evaluate the an-
swers to two questions: What are the relative advantages of pursuing a stated
business objective with and without the alliance? and Does meaningful exchange
value exist that can be realised through this alliance? Once a firm determines it is
likely to benefit from a strategic alliance, a four-step process is necessary to bring off
the alliance. These steps are: achieving strategic harmony, selecting partners,
developing action plans to achieve strategic objectives, and assessing the extent to
which the alliance reaches stated goals.
Many alliances experience problems almost before they begin. Well-designed
alliances begin with clear strategic visions a sense of strategic harmony exists
among the partners. Strategic harmony is unlikely to be achieved if the alliance is
one-sided. Strategic partners should also share a common orientation toward the
future. The partners individual characteristics should mesh together in a logical,
complementary, and mutually beneficial fashion. Generally speaking, strategic
alliance partners should select partners that complement one another with respect to
products, market presence, or functional skills.

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Once a strategic alliance is formed, the partners will generally form an alliance
team. This team consists of employees from each firm engaged in the strategic
alliance. While these designates, in part, represent their firms interests, team
members highest priority should be the maintenance and success of the alliance
itself. The alliances performance should be evaluated as part of the partners
collaborative efforts. This evaluation should determine whether alliance benchmarks
have been achieved, whether objectives need to be modified, and whether environ-
mental changes have occurred that should make the partners reassess their strategic
course of action.
Many strategic alliances fail. Shortfalls in partner selection or alliance strategy
development are the primary culprits. Channel members should not rush into deals
or expect immediate results from a strategic alliance. Patience is usually a virtue,
particularly since strategic alliances themselves represent a long-term commitment
to collective channel performance.

18. Strategic Implications for the New Millennium

Learning Objectives
After reading this module, you should be able to:
Summarise the areas of change in channels as outlined by the CRM.
Understand key channels practitioners views on the future of marketing
channels, specifically:
The role of channels in the marketing mix
The external channel environment
The internal channel environment
Relationships and the interaction process
In marketing channels, organisations come together primarily as a way of achieving
common goals. Based mainly on a desire to beat the competition, a relationship
orientation will sometimes arise between firms in a marketing channel. The perfor-
mance of these relationship-oriented channels is usually better than that which
would be achieved by the firms if they were to act independently. That, in a nutshell,
is what marketing channels today are all about.
Throughout this text, we have seen how changes in the external and internal
environments of firms bring about changes in their marketing channel strategies.
Yet, despite the changes, the structure of marketing channel relationships themselves
usually remains intact. The CRM, thus, provides a useful framework for looking
ahead to the likely state of marketing channels in the next century.
Think back to our description in Module 2 of how channel roles can be traced
back to streetside peddlers operating in ancient Rome. Today, one would be hard-
pressed to find streetside peddlers dominating retail distribution in any first- or
second-world economy. Times and circumstances have long since changed and

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methods of distribution have changed with them. After all, what would Thomas
Watson, president of IBM during the 1950s and early 1960s, have to say about the
millions of computers that IBM has distributed worldwide? Watson was once heard to
speculate: There is a world market for about five computers.
The standards for achieving customer satisfaction have clearly changed as well.
Exchange utility was discussed in Module 1. Examples of the importance of
exchange utility are virtually endless. Take, for example, the notion of time utility.
Many American consumers have come to expect one-hour service on everything
from digital photo processing to prescription eyeglasses. Dominos Pizza built its
empire on fast, fresh delivery. FedEx, United Parcel Service, and the United States
Post Office all compete for the rapidly growing overnight delivery market. Time
utility applies to each link in the marketing channel. You may recall from Module 11
how emergent information technologies have changed the rules by which fast
service is judged. From just-in-time manufacturing to quick-response retailing, time-
saving tools for managing the flows of goods and services have become expected in
marketing channels.
The political economy model described in Module 5 illustrates how the socioeco-
nomic and political landscapes are also changing. Instabilities and uncertainties in the
political economy are particularly germane to the global dimensions of channel
members environments. As discussed in Module 8, multinational distribution
channels increasingly operate with little regard for the traditional borders of nations.
In short, marketing channel environments today are marked by a nearly borderless
world. The future appears even more unbounded.

18.1 Channel Management: Practitioners Insights

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