KELLOGG ON MARKETING Second Edition Edited by Alice M. Tybout Bobby J. Calder ® wiley John Wiley & Sons, Inc. Published imclaneouy in Canada nied Sees at (90) 762-2974, uide ‘he United Sate a (317) 572-3958 Bax 17) 5724002 bok in a vray of electronic foam Some content tat pea it lcsonic book. For more information sbout Wiley produc, Library of Congress Catlging-in-Pabiation Data allog o alaing / [ited by] ABce M. SHbout, Hobby Calder — 2nd od 2o10010869 Peite i he United tater of Amer woe7 654321CHAPTER 11 MARKETING CHANNEL DESIGN AND MANAGEMENT ANNE T. COUGHLAN INTRODUCTION Corpor ratetng manager ork wide ae perpetually challenged by mating channel design and management Problers A makeing cantel structure (ometies now a channel of tibuon isthe tof pathy a product or service follows ater production, ‘culminating in purchase and use by the fi | "The appropriate struc fore esponistoanundesonding of no bat ho they want to buy The eaking » is a key tool in 3 company's profitably. Distribution channels are complex and can change over time, Consider the flowing ange, wh Sg bt hemi ae eg ia raring chanel miragement andthe complet and brad me ene verve ee ae ace ‘The Distribution of College Textbooks The distribution of college textbooks used to be an orderly ali. Authors wrote the books; publishers took care of promotion, physical production, stor- age, and intial shipments; and independent distributors took these shipments books. A limited and localized used-book market placed only a small damper fon sales of new books, Students typically bought all their textbooks, so fore- casting sales based on past course enrollments was easy, 232 CHANNEL DESIGN AND MANAGEMENT. 233 However, with the rise of Internet bookselling, students learned they could buy their books fiom sources other than the university bookstore, setting off some price competition and making it difficult to accurately reward publishers! salespeople for book sales (given that many textbook purchases were no longer ling also made wsed-book sles exsey, in foreign markers? Ie was only a matter of time before enterprising aries in these forcign markets perceived an arbitrage opportunity, leading to wide availabilty of the reduced-price editions online in the United States. The paper-based distribution of textbooks had become a much less predictable, profitable business than it had been in the past ‘By 2010, the textbook market ficed a fascinating transformation—from books. With the majority of college students possess- made sense to foster an electronic marketplace for sribution drops Wholesaler = Retailer + Industial and/or Houschold End-User Inventory carying costs Ownership Producer = Wholesaler = Retailer = Industrial and/or Housshold End-User promotion, publicity, public relations Personal selling, advertising, sles costs Promotion, Producer < Wholesder 4 Ressler ¢> Industrial and/or Household End-User ‘Time and legal costs Negotiation Producer > Wholesile: 4 Retailer 4 Industrial and/or Household End-User (Cendie corms, terms and condicions of sale Financing Producer Wholesiler ¢ Retaler ¢ Industrial and/or Howsehold End-User Jnsarance, installation, repair, and Price guarantees, warranties, aerale service coss Risking User = Reniler Indweral and/or Household End: ‘Wholesaler = Producer (Order procesting costs Ordering Induscial and/or Household End-User + Retailer => ‘Wholesaler => Producer Collections, bad debe costs Payment Nowe ‘The town of cv show ote pial at an vary ot cnn to bane For ample x eer sy ie defor proce hat hipped iy fom ibe batufraer ioe end ee csig ysl posteion 0 as deny or he mature oe caer, Each eine member who pss Ene pafsmnnce of chal Bow bes si, Prdicony cal, and ti ae colleceey le he Comarca Channel Saja. EA2 205 af ‘hanna mais who ca prin Sanne! ows ba ve not cased comma hase weber.242 KELLOGG ON MARKETING performing these flows. The lscis generic and can be expanded and customized to a particular channel’ situation; but the activities represented are eypical of ‘most channel stractures. For example, the family on vacation described previously has a high demand for spatial convenience and minimal tolerance for out-of-stocks of laundry detergent. This means that good performance ofthe physical posession channel flow (the physical holding of inventory) takes on great importance for such end-users, Each produet- oF service-selling situation cam have its own unique spot demands by segment, implying the differential service outputs that are deman the market). The design of che channel sinctre . Fist che channel designer must decide who should be che members ofthe channel. For example, will a manufacturer of 1 i prone oee/pein ere bon though br independent tracking ‘companies, financing companies, and/or any of whole host of other possible independent distribution channel members that could be incorporated into the channel desig. ‘Beyond this decision, the channel manager must also decide the exact iden ‘ity of the channel partner to use at each level of the channel. If a line of gh retail stores, for example, should the outlets ‘Tiffany’, or should they be family-owned local ‘implications both for the efficiency with which wage connoted by distributing through a particular ¢ context, if company seeks distribution for its kkey decision may be which distributor is ap- pointed eo carry the produerline inc the oversea market. The right dieibutor smay have much better relationships with local channel partners in the target smarket, which can significantly affect the success of the foreign market entry. ‘The other main element of the channel structure isthe decision of how many of each type of channel jude in the channel. This i the channel intensity decision. I hannel fora consumer good include many retail outlets just a few (selective distribution), or only one (exclusive jon) in a given market area? The answer to this CHANNEL DESIGN AND MANAGEMENT. 243. ementation factors. More easly available to all earget among the retailers selling it, resulting in destructive price wars among them. The price wars may negatively affect their margins, which in turn may cause them to be less interested in promoting or supporting the product structure decisions of type, identity, and intensity of channel question depends both on efficiency and on channel; but a careful channel audit can lead to cost savings in the channel that produce ditect profitability results ‘This exercise results in one channel profile for each segment that was iden tified in the market segmentation stage of the exercise. Each of these chanel profiles is called a zero-based ‘operations —thatis, ket. The concept of a ze10-based channel means ‘output demands are met, and (b) they are met at segments that offer revenue potential? The answer is that channel members face bounds on their ability to build the appropriate channel design for every segment both efficiently (at low enough cost to be profitable) and effectively (to create high end-user satisfaction) i channel factors and external environmental factors are instru- jing these bounds. Internally, manggerial bound may con the channel manager ffora implementing the 2ero-based channel (for exan op management of a manufacturing firm may be unwilling build a series of regional warehouses that would be necessa convenience in a particular mat Externally bounds and competitive benchmarks may suggest some segments as higher priority than others, For example, legal isues and constraints can affect channel design and hence limit targeting decisions. Alcoholic beverage distribution is highly regulated in the United States; many states license only a limited number248 KELLOGG ON MARKETING ments demands for service outputs, the channel manager may recognize an tunexploited market opportunity and create a new channel to serve that un~ derserved segment. Meeting previously unmet service output demands can. bbe a powerful competitive strategy for building loyal and profitable consumer bases in a mnatketplace. But these strategies are impossible to identify without eto buy, but importantly, how they terms of chanael flow performance seeks to identify a subset of all the plant on targeting, based on the channel designer’ segmentation and positioning insights. Establishing of Refining the Channel Structure "The channel manager has now identified the optimal way to reach each tar- sgeted segment in the market, and has also identified the bounds that might prevent the channel from implementing the zero-based channel design in the ‘market, Ifno channel exists currently in the market for this segment, the chan- nel manager should now establish the channel design to meeting the target market’: demands for service ourputs, subject to the covironmental and managerial bounds constraining the design, If there i¢ a preexisting channel in place in the market, however, the channet ‘manager should now perform a gap analysis. The differences on the demand and supply sides between the zero-based and actual channels constitute gaps in the channel design, Gaps can exist on the demand side or om the supply side, as Figure 11.4 suggests. demand side, gaps mean th demands is not being appropriately met ‘question may be either undersupplied or oversupplied. The problem is obvious in che cae of undersupply: the target segment i likely to be dissatisfied because these customers would be willing to pay for more service than they are getting. "The problem is more subtle in the case of oversupply. In this case, target end users are getting all the service they desite—and then some—so end-user satisfaction is not an isue, t costly t0 CHANNEL DESIGN AND MANAGEMENT. 25 generating a net profit gsin, Clearly, more than one service output may bea problem, in which case several demar ps may need attention. (On the supply side, gaps mean that ac least one flow in the channel of distribution is carried out at too is willing Supply-side gaps can tesule from a lack of up-to-date expertise in channel low management or simply fiom waste in the channel. ‘The challenge in closing ‘a supply-side gap is to reduce cost without dangerously reducing the service ‘opts being supplied to target end-users. ‘When gaps are identified on ehe demand or supply sides, there are several strategies availabe for closing them, as Fi 5 suggests, But once a chanel is already in place, it may be difficult and costly to close these gaps. This suggests the strategic importance of initial channel design. If dhe channel is initially designed in a haphaeard manner, channel members may have to lve th a suboptimal channel later on, even afier recognizing channel gaps and making best efforts to close them. MANAGEMENT OF THE MARKETING CHANNEL: POWER, CONFLICT, AND COORDINATION ‘Even with a well-designed channel structure, the channel manager faces the ongoing task of coordinating the actions of all channel members. This section246 KELLOGG ON MARKETING Figure 11.5, Ei lee hee Gore ec Supply Side Gaps Flow costis too high Which Nowe)? Demund Side Gaps —Orter tired service levels —Bxpindleontact provision of serves ‘uiputs Change seement(s) sargeted discusses how the concepts of channel power and channel conflict help the channel manager improve overall channel coordination. Channel Power ‘The channel manager's job is still not done, assuming that a good channel design is in place in the market, The channel members now must sraplement the optimal channel design, and indeed must continue to implement an optimal design over time. The value of doing so might seem to be self-evident, but itis important to remember that a chan (companies, agens, individuals) that are not all have the same incentives to operate CHANNEL DESIGN AND MANAGEMENT 247 among channel members would not be a problem sit on cach other. But by the very nature of the sure and design, specific channel membets are likely 0 specialize in pat ivities and flows in the channel. If all channel ‘members do not perform appropriately, the entire channel effort suffers. For Incompatible incent ‘example, even if everything else isin place, a poor-performing transportation system that results in late deliveries (or no deliveries) of product to retail stores prevents the channel from selling the product. The same type of statement could be made about .ce of any channel member doing any of the flows appatent that inducing all of the chanel design appropriately is critical in the face of interdependence among channel partners, when not all have the incentive to cooperate in the performance of their designated channel flows? The answer lies in the possession and use of channel power. A channel member's power “is the ability of one channel member (A) to get another channel member (B) to do something it otherwise would not have done.” A’ power over B is greater, the more uilty A can offer to B, and the sca tility that A. can offer to B for complying with A’s requests. In particular, these two forms of power are complementary to each other: the more of one type of power A has over B, the more valuable on the margin is an increment in the other eype of power. Purther, A lacks power over B some of hath types of power: for example, if A were the only potential channel partner to have personnel who speak French, ths ‘would endow A with scnity; bur, iB secks to enter the Japanese market, French-speakers are unlikely to provide much uty, and therefore the sarcicy of knowledge of French endows A with mo real power, Alternatively if A vere a transportation firm that could offer reliable trucking services to B, but if there were many sinalaely capable transportation firms, A would be able to offer utility to B, but not sarsity—again, reslting in no real power of A over B. Scarcity monopoly power in economics. Utility, however, isles immediately actionable froma a channel management point af view. What sorts of wlity could A oer to 1B? One approach posts five kinds of channel power, each of which influences the utility A ean offer to B.A is sid to have 1» intuitive criterion for power: it corresponds to the notion of ++ Coercive power over B if B does what A wants because of the threat that Jhold something of value from B if B does not comply with248. KELLOGG ON MARKETING + Rewer! power over B ifB does what A wants because B will geta (financial ‘or other) reward from A for complying. te power over B if B does what A wants because B perceives that ‘A has the right to tell B what to do, ‘+ Expertise power over B if B does what A wants in order to gain access to {A's kmowiedge or proficiency. + Referent power over B if B does what A wants in order to “look like” or benefit from the brand equity of A. Notice that with each of these power sources, B expects some reward (or a failure to take away a reward) from A; these can all therefore be thought of 3s types of uilty power in the utliey/scarcity dichotomy. ‘Channel power can be used to further one channel member's individual ends. But if instead channel power is used to influence channel members to do the jobs that the optimal channel design specifies that they should do, the result will be 2 coordinated channel that more closely delivers demanded service outputs at a lower cost Channel Conilict Channel conflict is generated when one channel member’ actions prevent the chanmel from achieving its gools. Channel conflict is both common and dangerous to the success of distribution efforts. Given the interdepen- dence of all channel members, any one member's actions have an influence ‘on the total performance.!? ‘Channel conflict can stem from differences between channel members ‘goals and objectives (goa! confit); fiom disagreements over the domain of re~ sponsibility and in confit); and from differences nfl). These cones directly ‘cause channel members to fal to perform the flows that the optimal channel sign specifies for them, and thos inhibit total channel performance. The ‘management problem is twofold. First the channel manager needs to be able to identify the sources of channel conflict and, in particular, to differentiate ‘between poor channel design (which can of course also inhibit channel per- formance) and poor performance due to channel conflict. Second, the channel ‘manager must decide on the action to take (if any) to manage and reduce the of the channel effort, and thus can harm total channel In general, channel conflict reduction is accomplished through the applica tion of one or more sources of channel power, For example, a manufacturer CHANNEL DESIGN AND MANAGEMENT. 289 nay identify @ confict in ts independent distributor channel: the dstiburor- tle sales effore on behalf of the manufacturers product he product ae suffering. Analysis might reveal that the because the distibutorship makes more profit from selling a competitor’ product than from selling this manufacturer’ product. There js thos 2 goal conflict. The manufacturer’ goal is the maximization of profit ‘over its own product line, bu profit overall ofthe products particular mamafacture, To resolve the goal conflict, the manufacturer might tase some ofits power to rewatd the distributor by increasing the distebutor’s smansifactorer’s prog ‘brand equity and ‘thus pull the product through the channel. In that cas, its brand povrer induces the distributor to sell the product more aggressively because the sales potenti for the product has risen. In bath eases, some sort of leverage oF power on. the part of the manufacturer is necessary to change the distributor’ behavior and thus reduce the channel conflict. Besides obvious bases of power such as coercion and reward, leve through expertise, legitimate authority (e., contacts) cof brand equity, an exemple of referent power. ‘can make Channel Coordination [Alter following the steps ofthe channel management schematic the chanel will have been designed with target end-user se output demands in mind, and channel power, will be appropriately applied to ensure the smooth implementation of the optimal channel design. When the disparate members of the channel are brought together to advance the ‘roils of che channel, rather than theie own indepe ing) goals, the chanel i sad to be cordinaed. This term is used co denote both the coordination of interests and actions among the channel members who produce the onputs of the masketing channel, and the coordination of performance of channel fiows with the production of the service outputs demanded by target end-users, This isthe end goal of the entice chann ‘management process. As conditions change in the marketplace, the channel dlesign and implementation may need to respond thus, channel coordinati js not a one-time achievement, but an ongoing proces of analysis and sponse to the market, the competition, and the abilities of the members of the channel