MARKETING CHANNELS and DISTRIBUTION SYSTEM

Midterm Module/Learning packet 1

Lesson: Marketing Channels: Structure and Functions

Objectives:

1. explain marketing channel and why manufacturers choose to use

intermediaries between themselves and end-users
2. Identify the members of marketing channels and the elements of a
framework for marketing channel design and implementation

LESSON PROPER:

I. Concepts and Examples:

 Marketing channels are the routes to market used to sell every product and
services that consumers and business buyer purchase everywhere in the
world.
Why marketing channel?
1. Gatekeeper between the manufacturer and the end-user

 This means that failing to understand and proactively

manage the actions of one’s channel partners can lessen the
effective reach and attractiveness of the manufacturer’s
products or services.
2. Important asset in the company’s overall marketing and positioning
strategy, often serving as the main differentiator of the market offering
from those of its competitors.
 The emphasis is on product or feature differentiation, which leads
manufacturers to focus on research, development, and
innovation as key to success

3. Channel experience strongly affects the end-user’s overall perception

of a brand’s image and hence, end-user satisfaction.
4. Awareness of the channel as a key strategic marketing asset is low in
many firms and industries.
 In this sort of competitive environment, the manufacturer that
sees that value of positioning through effective channel design
and investing in cost efficiencies in that design beats its rivals
handily.
This learning material is intended for educational purposes only and not for any profitable
reasons. Reference: Coughlan, A. et. al. A comprehensive Study of Marketing
Channels.
 5. Companies find it hard to create and maintain a well-working channel
design

 It is therefore useful to develop a framework for thinking about

the problem that will help companies at every level of the
channel operate more profitably and do a better job of meeting
end-users’ demands and preferences.
 Marketing channel system is a competitive asset that is not easily
replicated by other firms and is, therefore, a strong source of
sustainable competitive advantage
 Building or modifying the channel system involves costly and hard-to-
reverse investments
 This means that making the effort to do it right the first time has
great value and, conversely, making a mistake may put the
company at a long-term disadvantage.
What is Marketing Channel?

 a set of interdependent organizations involved in the process of making

a product or service available for use of consumption.

 As an Interdependent organizations
 Marketing channel is not just one firm doing its best in the
market, whether that firm is a manufacturer, wholesaler, or
retailer. Rather, many entities typically are involved in the
business of channel marketing. Each channel depends on
the others to do their jobs.
 As a Process
 distribution frequently takes time to accomplish, and even
when a sale is finally made, the relationship with the end-
user usually is not over
 purpose of channel marketing

 to satisfy the end-users in the market, bet hey consumers or

final business buyers.

Two forces for channel development and change:

1. Demand-side factors:
 Marketing channels containing intermediaries arise partly
because they facilitate searching. The process of searching is
characterized by uncertainty on the part of both end-users and
sellers.
 • End-users are uncertain where to find the products or
services they want, while sellers are uncertain how to reach
target end-users.
• If intermediaries do not exist, sellers without a known brand
name could not generate many sales. End-users would not
know whether to believe that manufacturers’ claim about
the nature and quality of their products. Conversely,
manufacturers would not be certain that their promotional
efforts were reaching the right kind of end-user.
 adjustment of assortment discrepancy

• Independent intermediaries in a marketing channel

perform the functional of sorting goods.

• This is valuable because of the natural discrepancy

between the assortment of goods and services made by a
given manufacturer and the assortment demanded by the
end-user.
• This discrepancy results because manufacturers typically
produce a large quantity of a limited variety of goods,
whereas consumers usually demand only a limited quantity
of a wide variety of goods.

Sorting functions performed by intermediaries includes the following:

1. Sorting
 This involves breaking down a heterogeneous supply into
separate stocks that are relatively homogeneous
• e.g. a citrus packing house sorts oranges by size and grade
2. Accumulation
 The intermediary brings together similar stocks from a number of
sources into a larger homogeneous supply.
• Wholesalers accumulate varied goods for retailers, and
retailers accumulate goods for their consumers.
3. Allocation
 This refers to the breaking down a homogeneous supply into
smaller and smaller lots.

Breaking bulk
 Allocating at the wholesale level
 Example; goods received in carloads are sold in case lots.
A buyer of case lots in turn sells individual units
 4. Assorting
 This is the building up of an assortment of products for resale in
association with each other.
 Wholesalers build assortments of goods for retailers, and retailers
build assortment for their consumers
 Intermediaries help end-users consume combination of product and
channel services that are attractive to them

2. Supply-side factors:
 Routinization of transactions
 Purchase transaction involves ordering of, valuation of,
and payment for goods and services
 The buyer and seller must agree on the amount, mode,
and timing of payment.
 The costs of distribution can be minimized if the transactions
are made routine; otherwise, every transaction is subject to
bargaining, with an accompanying loss of efficiency
Routinization

 Leads to standardization of goods and services whose

performance characteristics can be compared and assessed
easily.

 It encourages production of items that are more highly valued

 It leads to efficiencies in the execution of channel activities

o Example, continuous replenishment programs(CRP) are

an important element of efficient channel inventory
management.

 Reduction in number of contacts

 Without channel intermediaries, every producer would have to
interact with every potential buyer in order to create all possible
market exchange. As the importance of exchange increases in a
society, so does the difficulty of maintaining all these interactions.

 The number of necessary contacts increases dramatically as more

wholesalers are added.
 A decentralized system of exchange is less efficient than a
centralized network using intermediaries.
  Intermediaries participate in the work of the marketing channel
because they both add value and help reduce cost in the
channel.
Key members of a marketing channel:

1. Manufacturer
 The producer or originator of the product or service being sold.
Two distinction:

1. Branded manufacturing
 Manufacturers brand their products and thus are known by
name to end-users even if they use intermediaries to reach
those end-users
2. Private label manufacturing
 Denoting a product manufactured or packaged for sale
under the name of the retailer rather than that of the
manufacturer
 In case of insurance companies some of the key channel
flows promotion and risking
2. Intermediaries
 Any channel member other than the manufacturer or the end-user
(individual consumer or business buyer)
Types of intermediaries:

 Wholesale intermediaries
 Manufacturer’s representatives
 Agents

 Brokers
 Wholesale intermediaries
 Wholesalers sells to other channel intermediaries, such as
retailers, or to business end-users but not to individual
consumer end-users.

Include:
a. Merchant wholesalers or distributors
 Take both title to and physical possession of inventory,
store inventory,
 Promote the products in their line, and
  Arrange for financing, ordering, and payment with
their customers

 They make their profit by buying at a wholesale price

and selling at a marked-up to their downstream
customers.
b. Manufacturer’s representatives, agents, and brokers
 Do not take title to or physical possession of the
goods they sell
 The major flows in which they take part are promotion
and negotiation in that they work on selling the
products of the manufacturers they represent and
negotiating terms of trade.

c. Trading companies or import-export agents specialize in

international selling whether or not they take on title and
physical promotion flows

 Retail intermediaries
 Forms of retail intermediaries:

 Department stores
 Mass merchandisers
 is a company that affordably sells large quantities of
goods that appeal to a wide variety of consumers

 provide a one stop shop for all the groceries and

provide multiple items like appliances, furniture,
accessories, clothing etc.
 .Hypermarkets

 superstores with department store and a grocery

supermarket
 Specialty sores
 are retail businesses that focus on specific product
categories, such as office supplies, men's or women's
clothing, or carpet. It isn't the product they sell that
determines if a company is a specialty store, but
rather the breadth of their product offering. If a
company could be considered an expert in a certain
type of good, it is a specialty store
  Category killers
 it offers an extensive selection of merchandise at
prices so low that smaller stores cannot compete
 Convenience store

 Franchises,
 Catalogers;
 Online retailers, etc.

 They sell directly to individual consumer end-user

 They may sell to buyers other than consumer end-users
 Specialized intermediaries

 are brought into a channel to perform a specific flow and typically are
not heavily involved in the core business represented by the product sold

 Insurance companies, finance companies, credit card

companies(all involved in the financing flow), advertising
agencies, information technology firms(who may participate in
ordering or payment flows), and marketing research firms (
generating marketing intelligence that can be useful for the
performance of any of the flows).
End-users
 Either business customers or individual consumers are themselves
channel members
 Classified as channel members because they can and frequently do
perform channel flows, just as other channel members do.
 They perform physical possession, ownership and financing flows
 They bear all the costs of ownership as well, including pilferage, spoilage
and so forth
 The range and number of channel members are affected by the nature
of demand by end-users, and the captaincy of the channel can vary
from situation to situation.
 Framework for Channel Analysis

 Channel managers need a comprehensive framework for analysis

to guide them through both the initial design of the channel and
its ongoing management overtime.
  Without framework they may ignore important elements of the
design or management processes, resulting inappropriately
constructed or managed channels.
 The concept of interdependence is critical in this regard, because
of the extreme interdependence of all channel members and the
value of specialization in channels, attention must be paid to all
design and management elements to ensure a well-working
marketing channel.
 For instance, even the best-designed channel is completely
unproductive if the retailer neglects to stock product on the
retail shelf. Consumers will not buy what they cannot see in
the store.

 Attention must be paid to all design and management elements

to ensure a well-working marketing channel.
Marketing channels involve two processes:
1. Designing the right channel, and
2. Implementing the design

1. Design process involves:

a. Segmenting the markets
b. Choosing which segment/s to target, and

c. Producing channels service outputs for the target end-users in the

most efficient way possible

 The efficiency imperative implies a need to understand what the work

of the channel is, in order to choose the kinds of intermediaries to include
in the channel, their specific identities, and their number and to allocate
the work of the channel optimally among them
Design process:
 Implies the need to match the demand and supply sides of
the channel to meet target end-users’ demands at the
minimum possible cost.

 Also allows for an examination of the gaps that may exist in

current channel operations and suggestions for their control
or elimination
 2. Implementation process requires:
1. an understanding of each channel member’s sources of power
and dependence,
2. an understanding of the potential for channel conflict, and

3. a resulting plan for creating an environment where the optimal

channel design can be effectively executed on an ongoing basis
Channel Design: Segmentation

 One of the fundamental principles of marketing is the segmentation of

the market.
 Segmentation means the splitting of a market into groups of end-users
who are:
a. Maximally similar within each group
b. Maximally different between groups
 For marketing channel manager, segments are best defined on the basis
of demands for the outputs of the marketing channel

 A marketing channel is more than just a conduit for product; it is

also a means of adding value to the product marketed through it.

 In this sense, the marketing channel can be viewed as another

production line engaged in producing not the actual product
that is sold but the ancillary services that define how the product
is sold. These value-added services created by channel members
and consumed by end-users along with the product purchased
are called service outputs.
 Service outputs include but may not be limited to bulk-breaking,
special convenience, waiting and delivery time, assortment and
variety, customer service, and product/market/usage information
provisions.
 End-users (final consumers or business buyers) have varying
demands for these service outputs.
 Different segments of end-users can demand the same type of
product with widely varying sets of service outputs, resulting in very
different product-plus-service-output bundles.
Channel Design: Channel Structure Decisions

 Knowing the intensity of demands for service outputs by different

segments in the market, the channel analyst can identify the most
 efficient and effective channel structure to satisfy these demands. A
different channel may (indeed or probably will) be required by each
segment’s set of service output demands, and this channel’s design
involves three main elements.

Three main elements:

1. Who are to be the members of the channel?
 For example: will an ethnic food manufacturer sell its grocery
products through small independent retailers with in city
locations or through large chain stores that operate discount
warehouse stores? Or will it use an outlet as an online seller of
products from various countries that operates no retail stores at
all?

 Moving up the channel from the retail level, the channel

designer must decide whether to use independent distributors,
independent sales representative companies, independent
trucking companies, financing companies, export
management companies, and any of a whole host of other
possible independent distribution channel members that could
be incorporated into the channel design.
2. Deciding the exact identity of the channel partner to use at each
channel level
 For example, if it is advisable to sell a line of fine watches through
retail stores, should the manufacturer choose more upscale
outlets?
 The choice can have implications both for the efficiency with
which the channel is run and the image connoted by distributing
through a particular kind of retailer.
 If a company seeks distribution for its products in a foreign market,
the key decision may be which distributor is appointed to carry
the product line into the overseas market.

 The right distributor may have much better relationships with local
channel partners in the target market and can significantly affect
the success of the foreign market entry.
 3. How many of each type of channel member to be included in the
channel?

 This is the channel intensity decision.

 In particular, should the channel for a consumer good include
many retail outlets (intensive distribution), just a few(selective
distribution) or only one (exclusive distribution) in a given market
area?

 The answer to this question depends both on efficiency and

on implementation factors.
 More intensive distribution may make the product more
easily available to all target end-users but may create
conflict among the retailers competing to sell it.

Channel Design: Splitting the Workload

 The optimal channel determined by the channel flows that must be
performed to satisfy the specific target segment’s service output
demands.
 Channel flows include all the activities of the channel that add value to
the end-user.
 The type, identity, and intensity of channel members should be decided
keeping in mind the goal of minimizing channel flow costs.

 Each channel member is assigned a set of channel flows, and

ideally the allocation of activities results in the reliable
performance of all channel flows at minimum total cost.
Channel Design: Degree of Commitment
• How deeply committed should the channel members to this channel of
distribution?
• There is no guarantee that a company’s supplier(or buyer) in a
transactional channel will continue to do business with company in the
future
• An intermediate step that involves more commitment between channel
members is the creation of a distribution alliance.
• a well-working alliance is characterized by partners that act
according to a single, overarching interest rather than merely
following their own individualized goals.
 Steps that involve more commitment between channel members:
a. Creation of distribution alliance

 The channel members involved typically have an enduring set of

connections that can span multiple functions through-out the
companies.
 In such a situation, the channel members involved typically have an
enduring set of connections that can span multiple functions throughout
the companies
 As a result, a well working alliance is characterized by partners that act
according to a single, overarching interest rather than merely following
their own individualized goals.
b. Vertical integration

 Manufacturers may decide to vertically integrate forward into

wholesaling and/or retailing when other options do not exist.
Channel design: Gap Analysis

 At this stage of the analysis, the channel manager is now equipped to

decide what segments to target? This also means that the channel
manager is now equipped to decide what segments not to target.
 Knowing what segments to ignore in one’s channel design and
management efforts is very important because it keeps the channel
focused on the key segments from which it plans to reap profitable sales.
• Why not target all the segments identified in the segmentation analysis?

 Consider the channel’s internal and external environments

Internal:
 Managerial bounds may constrain the channel manager
from implementing the optimal channel
 e.g.Top management of a manufacturing firm may be
unwilling to allocate funds to build series of regional
warehouses that would be necessary to provide spatial
convenience in a particular market situation.

External
 both environmental bounds and competitive benchmarks
may suggest some segments higher priority than others

 For example, legal practices can constrain channel design

and, hence targeting decisions.
  To protect small shopkeepers whose sales would be
threatened by larger retailers, many countries restrict
the opening of large mass-merchandise stores in
urban areas.

 Such legal restrictions can lead to a channel design

that does not appropriately meet the target
segment’s service output demands and may cause
a channel manager to avoid targeting that segment
entirely.
 Knowing the optimal channel reach targeted segment and the bounds
that might prevent implementing that optimal channel design, the
channel manager is free to establish the best possible channel design if
no channel for this segment currently exists. If a channel already exist in
the market, however, the channel manager should perform a gap
analysis.
 The differences between the optimal and actual channels constitute
gaps in the channel design. Gaps exist on the demand side or the supply
side
 Demand side, gaps mean that at least one of the service output
demands is not being appropriately met by the channel

 Undersupplied or oversupplied
 Supply side, gaps mean that at least one flow in the channel of
distribution is carried out at too high cost.
 This not only lowers channel profit margins but can result in higher
prices than the target market is willing to pay, leading to reduced
sales and market share.
 Supply-side gaps can result from lack of up-to-date expertise in
channel flow management or simply from waste in the channel
 The challenge in closing the supply gap, reduce cost without
dangerously reducing the service outputs being supplied to target
end-users
 When gaps are identified on the demand or supply sides, several
strategies are available for closing the gaps.

 Once a channel is in place, however, closing these gaps may be very

difficult and costly. This suggests the strategic importance of initial
channel design.
 Channel implementation: Identifying Power sources
 A channel member’s power “is its ability to control the decision
variables in the marketing strategy of another member in a given
channel at a different level of distribution.”

 These sources of channel power can be used to further one

channel member’s individual ends.
 If channel power is a design species, the result will be a channel
that more accurately delivers demanded service outputs at a
lower cost.
 Channel implementation: Identifying channel conflict

 Channel conflict is generated when one channel member’s

action prevent the channel from achieving its goals

 Given the interdependence of all channel members, any one

member’s actions influence the overall success of the channel
effort and thus can harm total channel performance

 Channel conflict can stem from:

 Goal conflict: differences between channel member’s
goals and objectives
 Domain conflict: disagreements over the domain of action
and responsibility in the channel

 Perceptual conflict: differences in the perception of the

marketplace

 The management problem is twofold:

1. The channel manager should be able to identify the sources
of channel conflict and in particular, to differentiate
between poor channel design and poor performance due
to channel conflict.
2. The channel manager must decide what (if any) action to
take to manage and reduce those channel conflicts.
 Channel implementation: The goal of channel coordination

 This denote both coordination of interests and actions

among the channel members who produce the outputs of
the marketing channel and coordination of performance of
channel flows with the production of the service outputs
demanded by the target end-users.
  This is the end goal of the entire channel management
process.

 Channel coordination is not a one time achievement but

an ongoing process of analysis and response to the market

II. Enhancement activity

This learning material is intended for educational purposes only and not for any profitable
reasons.

Reference: Coughlan, A. et. al. A comprehensive Study of Marketing Channels.

Note: Return these pages to your AB 133 teacher.
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Module 1 Activity
Read the “The Tea selling in Taiwan: The Key Roles of tea
middlemen”,(adopted from Coughlan, A. et. al. A comprehensive Study of
Marketing Channels) and give what is being asked. Expound/justify your
answers. 30pts
 Give a brief summary of the reading
 Outline the key roles of the tea middlemen.
 Do you agree that the tea middlemen were just exploiters of the buy
and sell situation? Why or why not?