© 2013

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10
Channels of Distribution
and Logistics

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 Marketing Framework

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 Discussion Questions

• Apple introduced the Apple retail store in

2001 when it had less than 3% of the
computer market - prior to its introduction
of the iPod. Previously Apple computers
were sold through local computer
retailers.
1. What do you think prompted the idea for
Apple’s new retail strategy?
2. What were the risks associated with this
strategy?
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 Distribution Channels

• Distribution channel
• A network of firms which provides sellers a
means of infusing the marketplace with their
goods, and buyers a means of purchasing
those goods
• The goal is to do this efficiently and profitably
• Channel members include
• Manufacturers, wholesalers, retailers,
consumers, etc.

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 Functions of a Channel

• Customer-oriented
• Product-oriented
• Marketing-centric
• Logistics
• Coordinating flow of products and
information throughout channel

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 Channel Tension

• All channel functions must be done by

someone, the question is…
• What is the most effective and efficient way
to distribute the product?
• Tension in channels can be created by
each channel member
• Does member provide more benefit than they
cost?
– The make or buy decision

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 Channel Questions

• Which of these is more efficient? Why?

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 Channels and Supply Chains

• Supply chain
• Upstream partners
• Channel members
• Downstream partners

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 Channel Questions

1. Who is in Amazon’s supply chain?

2. Who is in Pixar’s channel?
3. How is Dell’s distribution different than
the others?

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 How to Design Channels

• Intensive distribution: widely distributed

• Drugstores, supermarkets, discount stores,
convenience stores, etc.
• Usually for simple, inexpensive, easily
transported products
• e.g., Snack food, shampoo, newspapers, etc.
 Why?
• Pull strategy: promote directly to end
consumers to pull through channel

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 How to Design Channels

• Selective distribution: limited distribution

• Usually for complex and/or expensive
products that require assistance
• e.g., Most cars, computers, appliances, etc.
• Push strategy: promote to distribution
partners to push goods to consumer
• Manufacturer has more control due to fewer
relationships to manage

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 How to Design Channels

• Exclusive distribution: extremely selective

• e.g., Ferraris, Rolex, etc.
• Manufacturers have the most control
• May become monopolistic

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 How to Design Channels

• How much distribution?

• Design needs to be consistent with other
marketing elements
• Wide distribution
– Usually goes with heavy promotion, lower
prices, average or lower-quality products
• Exclusive distribution
– Usually goes with less promotion, higher
prices and higher-quality products

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 How to Design Channels

• Pull strategy
• Incentives are offered to consumers to pull
products through the channel
• Advertise to consumers
• Offer price and/or quantity discounts
• Offer inexpensive trials or free samples
• Offer coupons and/or rebates
• Offer financing
• Offer loyalty programs/points

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 How to Design Channels

• Push strategy
• Incentives are offered to distribution
partners to push products through the
channel
• Advertise to partners (and consumers)
• Offer incentives to sales force
• Offer price and/or quantity discounts
• Offer financing
• Offer allowances for marketing activities

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 Power and Conflict in Channels

• Conflict arises in distribution channels

• e.g., Retailers don’t stock all of manufacturers
SKUs, disagreements on pricing, etc.
• Power is usually defined by size
• Having power can be effective
• However, exerting power over distribution
partners can lead to resentment and further
lack of cooperation
– e.g., Walmart threatens to stop selling your
product unless you agree to concessions

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 Power and Conflict in Channels

• Transaction cost analysis (TCA)

• Model that considers channel members’
production & governance costs
• Goal is to minimize both costs
• Production Costs
• Costs of producing/bringing product to market
• Governance Costs
• Costs involved with relational issues incurred
coordinating and controlling one’s partners

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 Power and Conflict in Channels

• Transaction value analysis

• A perspective that emphasizes the benefits
a company brings to its partners
• Goes beyond cost reductions
• Uses human relationship terms
– e.g, Communication, trust, satisfaction, etc.
• Goal is to enhance trust
• It’s also clearly important to deliver on one’s
promises

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 Power and Conflict in Channels

• Ways to resolve conflict

• Enhance communication to build trust
• Exchange personnel to better understand
members’ perspectives
• Mediation
• Negotiate through a third party
• Arbitration
• The third party makes a binding decision for
the two parties

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 Integration

• Vertical integration
• Moving backward or forward in a channel
• Forward integration
• Moving forward in a distribution channel
– e.g., Frigidaire purchases Sears or opens its
own retail stores
• Backward integration
• Moving backward in a distribution channel
– e.g., Sears offers its private label, Kenmore

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 Retailing & Retail Classifications

• Retailers have been gaining power and

momentum over the past 10-20 years
• Retailers are classified by ownership,
level of service and product assortment

• Management’s level of ownership

• Independent retailers
• Branded store chains
• Franchises
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 Retailing Classifications

• Level of service provided

• Full service: e.g., Nordstrom’s
• Limited service: e.g., K-mart
• Product assortment carried
• Specialty: carry depth not much breadth
– e.g., Toy stores
• General merchandise: carry breadth but not
much depth
– e.g., Department stores

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 Retailing Employees

• Retail employees are important

• Retailers should hire selectively, train well
and pair fairly
• Dissatisfied employees can lead to
dissatisfied customers and employee
turnover
• Employee turnover leads to “new” associates
who further cause customer dissatsifaction

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 Retailing Operations

• Operations are important

• Retailers should flowchart their operations
• Front-stage
– Elements customers see
• Back-stage
– Elements customers do not see
» Must be run efficiently to support front-stage
• The goal is to create effective and efficient
processes

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 Retailing Location

• Location is important

• Determine appropriate success factors

for your specific business; analyze
locations to pick ideal sites
• e.g., Population densities, income and social
class distributions, median ages, household
composition, etc.

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 Discussion

1. Why has Amazon succeeded online when so

many other companies have failed?
2. What is Amazon Go? How does it work?
3. Will Amazon Go become the future of retail?

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 Franchising

• Franchising
• Unique format of multi-site expansion
• Company can retain some control without
complete ownership or capital expenditure
• Types of franchising
• Product franchising
• e.g., Ford dealers, Coca-Cola bottlers, etc.
• Business format franchising
• e.g., McDonald’s, Holiday Inn, etc

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 E-Commerce

• The Internet is an important channel

• Online retail sales are about $175 billion,
growing about 10% a year
• Still only 10% of total retail sales
• Customers are younger & more affluent
• U.S. dominates but not by much

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 Discussion Questions

• How do you see the future for the

distribution of entertainment programs?

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 Catalog Sales

• Top 10 catalogers are B2B companies

• e.g., Dell, Staples, etc.
• 80 of the top 100 catalogers continue to
see sales growth

• Internet is well-suited for a search while

catalogs still dominate browsing
• Catalogs often complement not compete
with Internet
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 Sales Force

• Utilized extensively with a push strategy

• Important with undifferentiated products
• Sales force compensation
• Usually salary plus bonuses
• Tie compensation to performance evaluation
• Sales force evaluation factors
• e.g., Sales (by segment, product, etc.); time
with clients; expertise; days worked; etc.

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 Discussion Questions

What criteria would you utilize to evaluate

a car salesman?

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 Integrated Marketing Channels

• As the number of channels proliferates,

increasing care must be taken to
coordinate and integrate across them
• Companies must understand customer
behavior in order to design effective
distribution channels and to allocate
resources across channel options
• Know your customer!

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 Managerial Recap

• Distribution channels are the link from

the manufacturer to the customer

• Numerous thoughtful decisions must be

made in designing channels

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 Managerial Recap

• Channel entities are independent yet

interdependent organizations; thus,
conflicts may arise

• Conflicts are best addressed by

employing good communication and
trust, revenue sharing, or greater vertical
integration

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10. 36