Mnm2613 Marketing Value Chain

12mm
MARKETING
VALUE CHAIN
Marketing is not a function by itself or a task for just one person – its success
depends on several activities in the marketing value chain.
Understanding this value chain is important for companies to stay relevant,

and crucial for seeing a return on their investment in marketing. Companies
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
employ and interact with many members of the marketing value chain,
and therefore need to be familiar with the relationships between each link
in this chain.
Marketing Value Chain is about understanding this value chain, where

marketing fits into the chain, and what role marketers play within it.
Key concepts are:

• the nature of distribution and its role in the supply chain and marketing
• the concept of value chain marketing
• distribution channels in South Africa
• understanding channel design and channel selection
EDITOR: KM MAKHITHA
• functions in the value chain
MARKETING
• behavioural processes in the value chain
• trends in value chain development and online channels
• the supply chain and logistics industry in South Africa
• buyer-supplier relationships.
Marketing Value Chain is intended for undergraduate and postgraduate

diploma and degree students in Marketing. Entrepreneurs, business and
VALUE CHAIN
marketing executives, and business consultants will also find this book
beneficial.
Copyright 2018. Juta and Company [Pty] Ltd.
EDITOR: KM MAKHITHA
www.juta.co.za
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Marketing Value Chain
Edited by
KM Makhitha
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Marketing Value Chain
First published 2018

Juta and Company (Pty) Ltd
First Floor, Sunclare Building, 21 Dreyer Street, Claremont, 7708
PO Box 14373, Lansdowne, 7779, Cape Town, South Africa

© 2018 Juta & Company (Pty) Ltd
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Contents
About the contributors......................................................................................................................... viii

Preface........................................................................................................................................................... ix
1: The nature of distribution and its role in the supply chain�� 1

Introduction�� 1
Defining distribution�� 2
Resellers�� 2
Sales intermediaries�� 5
The importance of distribution channels�� 6
Functions of a distribution channel�� 7
Distribution channels close gaps and provide utility�� 8
Channel functions performed by intermediaries�� 9
The benefits, functions and activities performed by channel members��13
Benefits��13
Supply chain management��15
The supply chain��15
Definition of supply chain management��15
Decision areas in SCM��17
Characteristics of SCM��18
The value chain��19
Primary activities��20
Support activities��20
2: The concept of the value chain and its relation to marketing��24

Introduction��24
The value chain��25
Competitive advantage and value chain��26

The different types of activities��27
The role of marketing in the value chain��29
Marketing and Porter’s competitive strategies��32
The differentiation strategy��33

iv Marketing Value Chain
The low-cost strategy��36

The focus strategy��39
Segmentation and the value chain��41
The value proposition��42
Components of the value proposition��42
3: Marketing distribution channel value-adding activities��49

The marketing distribution channel within the marketing value chain��49
Political factors��51
Economic factors��52
Socio–cultural factors��52
Physical factors��52
Global factors��53
Technological factors��53
Marketing distribution channel members and the value they add��54
Manufacturers��54
Wholesalers��58
South African retailers��58
4: Understanding channel design and the selection of channel members��65

Channel design��65
The steps involved in designing a distribution channel��66
Step 1: Specifying the role of the distribution channel��67
Step 2: Selecting the type of channel��68
Step 3: Determining the intensity of distribution��69
Step 4: Choosing specific channel members��71
Types of intermediaries��71
Wholesalers��72
Brokers and agents��72
Retailers��73
Rack-jobbers��73
Variables to consider when selecting a channel member��73
Financial strength of the prospective partner��73
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Contents v
Sales strength��73
Product lines��74
Reputation��74
Market coverage��74
Sales performance��74
Managing strength��74
Equipment and facilities��75
Ordering and payment procedures��75
Willingness��75
Customer characteristics��75
Competition��75
Communication��75
Control��76
Designing distribution channels for consumer products and industrial products ��76
Distribution of consumer products��77
Distribution of industrial products��78
Techniques to select the best distribution channel option��79
Market considerations��79
Product considerations��80
Considerations regarding intermediaries��80
Company considerations��81
Selecting an option��82
Reasons for channel modification��83
5: Functions of the marketing value chain��88

Functions of a value chain��88
Purchasing��89
The purchasing department��90
Purchasing and other functions��92
Inbound logistics��92
Production and quality control��94
Quality control in the different functions of a business��95
The impact of quality control on small and large business structures��97
Total quality management��98

vi Marketing Value Chain
Demand and supply planning��98

Inventory management��99
Reasons for holding inventory�� 100
Order processing�� 101
Distribution�� 101
The choice of the distribution channel�� 102
Warehousing�� 102
The uses of warehousing�� 102
Different types of warehouse�� 103
Reasons for storing goods �� 104
Transportation�� 104
Different types of transport�� 104
Customer service�� 105
The importance of excellent customer service�� 106
Managing customer expectations�� 106
The consequence of bad service�� 107
6: Managing business relationships�� 110

Value within the supply chain�� 111
Value for consumers�� 111
Value for businesses�� 114
Value as a strategic objective�� 114
Value creation within a supply chain�� 115
The drivers of value�� 116
Relationship management�� 118
Defining relationship management�� 118
The antecedents of business relationships�� 118
Types of business relationships�� 119
Analysing customer profitability: Customer satisfaction and cost-to-serve�� 126
Customer profitability and relationship management�� 127
7: Behavioural processes in the value chain�� 133

The marketing channel as a social system�� 133

Contents vii
Behavioural processes�� 135

Conflict�� 135
Power�� 141
Role�� 144
Communication�� 145
8: Online channels and emerging trends in value chain management�� 151

Online channels and types of intermediaries in value chain management�� 151
Content sponsorship intermediary�� 152
Infomediary�� 152
Intermediary models�� 152
Emerging trends in value chain management�� 153
Internationalisation�� 154
Service chains more important than product chains�� 154
Importance of collaboration�� 154
Augmented reality�� 154
Procurement’s bigger role in the value chain�� 155
Index........................................................................................................................................................... 163

About the Contributors
General Editor
Prof Mercy Makhitha is an Associate Professor and Head of the Department of
Marketing and Retail Management at UNISA.
Authors
Prof Mike Cant is a Professor Lecturer in the Department of Marketing and Retail
Management at UNISA.
Me Cindy Erdis is a Senior Lecturer in the Department of Marketing and Retail
Mr Ricardo Machado is a Senior Lecturer in the Department of Marketing and
Retail Management at UNISA.
Prof Mercy Mpinganjira is the Director of the School of Consumer Intelligence and
Information Systems at the University of Johannesburg.
Me Marjorie Mtjekelo is the Provincial Manager of Pearson SA.
Dr Elmarie Strydom is a Senior Lecturer in the Department of Marketing and Sport
Management at the Vaal University of Technology.
Mr Danie Theron is a Senior Lecturer in the Department of Marketing and Retail
Prof Louise van Scheers is a Professor Lecturer in the Department of Marketing and
Retail Management at UNISA.
Prof Jan Wiid is a Professor Lecturer in the Department of Marketing and Retail

Preface
Marketing professionals need to understand the marketing value chain to be competitive.

The marketing industry is highly influenced by other members of the marketing value
chain, which requires marketing professionals to understand the value chain and its
activities. Gone are the days when businesses worked in silos. Instead, businesses
must work collaboratively with other members of the value chain. This also involves
collaboration internally, and externally with other value chain members.
Understanding the company marketing value chain is important, since it enables
the company to understand the needs of all its chain members. It also enhances the
relationship between the company and its value chain members. As companies expand
their business horizons and enter new markets, it is important that they gain an
understand of the value chain in that particular market. This implies that a company
would have different marketing value chains in different markets.
This book has been designed for students and other readers to understand the
marketing value chain and how it contributes to the competitiveness of the business.
The book starts off by discussing what a marketing value chain is, followed by the
discussion of all elements of the marketing value chain. It further covers the distribution
channels in SA, functions of the value chain, as well as behavioural processes and trends
in the value chain.


1: The nature of distribution and its
role in the supply chain 1
LEARNING OUTCOMES
After working through this chapter, you should be able to:

yy Regarding distribution channels:
–– Define what is meant by a distribution channel
–– Understand the importance of distribution channels
–– Explain the nature of distribution channels
–– Understand and discuss the distribution channel levels
–– Identify and understand the functions of a distribution channel
yy Regarding supply chain management:
–– Provide a definition of supply chain management
–– Describe the decision areas in supply chain management
–– Discuss the characteristics of supply chain management
–– Discuss the principles of supply chain management
yy Illustrate and discuss the value chain concept
yy Describe the different functions and activities performed by channel members
yy Identify trends in distribution channels.
Introduction
This book focuses on the value chain and how it manifests in organisations. Traditionally
the focus was on the 4 Ps – product, price, promotion, and distribution (place). This has
changed, and there is currently more emphasis on a holistic approach to the functions
of an organisation, including the marketing value chain.
To understand the marketing value chain, we must understand where distribution

and the supply chain fit into the marketing function and the organisation as a whole.
Distribution is the element of the marketing mix that makes sure that the product
reaches the customer. This implies that a range of activities need to be performed, and
that various institutions may be involved. Distribution as a function is the result of a gap
that exists between the place of production and the place of consumption. The primary

2 Marketing Value Chain
function of distribution is therefore to bridge or overcome the geographic gap that exists
between the manufacturer or producer of a product or service and the consumer of this
product or service. This gap may be overcome by means of the physical movement of
the product, or it may be bridged through electronic or virtual means.
In the past distribution was not regarded as being important, but this has changed
over the past few years, with more and more marketers realising its importance. It is
now seen as part of the total supply chain, which refers to all the business processes that
must be performed to get the product or service from the supplier to the consumer.
Distribution decisions have become so important in today’s business environment
that companies realise that management of the various business processes (the supply
chain) can mean the difference between the success and failure of a business. To run
a successful business, the supply chain must be effectively managed, and technology
must be used to its fullest potential to do this. The successes of many businesses are
dependent on their distribution decisions and to what extent they manage them.
Defining distribution
A distribution channel, generally speaking, is a structure or mechanism that is designed
to make a product or service available to an identified group of customers, or to the
market in general. Intermediaries, which are independent businesses that perform
specific tasks, help to get products and services from sellers to buyers. Examples of
intermediaries are wholesalers, retailers, and agents. If the process of exchange is the
essence of marketing, then distribution channels, by facilitating this process, perform a
critical role in the overall marketing function.1
The type of product or service being distributed influences the channel type. Fresh
fruit, for example, will require a relatively short and quick channel due to its perishable
nature, while wine will have a longer channel, as it can be stored for a relatively
long period. Channel structure, in turn, influences things like costs, price-setting,
promotional activities, and package design.2 Channel management, on the other hand,
refers to management tasks – planning, organising, implementation and control – as
applied in the organisation’s distribution channel.
Intermediaries can be grouped into two groups – those that take title of the products
(resellers) and those that take physical possession of the product (sales intermediaries).
Each of these is briefly explained below:
Resellers
Resellers buy products, thus taking ownership of them (or ‘title to’ them, in legal terms),
then resell them (to either companies or individuals) at an increased price. In South
Africa, the two main types of resellers are wholesalers and retailers.
A wholesaler is a person or firm that buys large quantities of goods from various
producers or vendors, warehouses them, and resells them to retailers. Wholesalers
who carry only non-competing goods or lines (for example one brand of maize)
are called distributors.3 A retailer, on the other hand, sells goods to consumers, not
other businesses.4

1: The nature of distribution and its role in the supply chain 3
Wholesalers
Wholesalers are businesses that mainly sell merchandise to retailers; to industrial,
commercial, institutional or professional users; or to other wholesalers. They can also
act as agents by buying merchandise on behalf of their customers. They add value to the
distribution channel by doing the following:5
They provide storage facilities. Dairy products, for example, are perishable goods
that have a limited lifespan. Wholesalers provide storage facilities for these products
until they are sold to a retailer.
They sell products in smaller quantities than they purchase them in (bulk-breaking).
They provide product ranges and assortments to retailers.
They decrease the physical contact cost linking the producer to the consumer by
eliminating client service or human capital costs, for example.
They may sometimes take on the marketing responsibilities for the products
they hold. Many create their own promotional material and have their own
telesales operations.
They purchase the finished product from the manufacturer and keep it in their depot
until it is sold to retailers. They thus take on the risks arising from a change in demand
for the product, a rise or drop in its price, or the product spoiling or being destroyed.6
There are four types of wholesalers that can be identified in South Africa:
1. Cash-and-carry wholesalers – Retailers buy from these wholesalers for cash and
transport the product to their store.
2. Rack-jobbers7 – Products such as batteries placed at the cash registers of one-stop
shops at service stations are a typical example of rack-jobber items. The rack-jobber
owns the products in the store and replaces them, and is only compensated for the
goods once they are sold by the store.
3. Truck-jobbers8 – Organisations that manufacture perishable goods which need
frequent replenishment frequently use truck-jobbers, because they distribute goods
only within a specific area in order to preserve the products’ freshness. They make
quick and regular deliveries, which is vital for goods such as bakery goods, meat,
and dairy products.
4. Mail-order wholesalers9 – These put goods up for sale in catalogues that may be
circulated broadly to agents. Honey Fashion Accessories uses this distribution
method.
Retailers
These are businesses that sell goods and services to end users (usually individuals)
for their own use and benefit. Retailers perform a number of tasks, such as keeping
inventory and selling products in smaller quantities than they purchase them in (bulk-
breaking), and they usually keep a wide range of products (supplied by manufacturers,
suppliers and wholesalers) to offer consumers a variety of products.

Some characteristics of retailers are the following:10

Retailers have direct contact with consumers. They know their customers’ needs
and keep goods in their shops to meet these.
Retailers sell goods for ultimate consumption by consumers. For example, groceries
bought from a local Spar or Pick n Pay are not for resale but for the consumer’s
personal use.
Retailers buy and sell goods in small quantities, so customers can fulfil their needs
without having to store large quantities.
Retailers generally require less capital to start and run their business
than wholesalers.
Retailers generally deal with different varieties of products, and give consumers a
wide choice.
Products and services are promoted and sold by the retailer.
The retailer decides on the final selling price of the product.
Retailers often have their own strong brand. Pick n Pay and Checkers are examples.
Retailers often have a much stronger personal relationship with the consumer.
Let us now take a look at the functions of these retailers within the supply chain.11
Range of merchandise – Retailers usually buy a range of goods from different
wholesalers and manufacturers. These items are selected based on the needs of their
customers, and they need to be bought and kept in quantities that are sufficient to
meet demand.
Storage of goods – It is not always possible to keep all goods on the sales floor, so
most retailers need a considerable amount of storage space to ensure they have
sufficient stock to meet customer demand.
Bulk-breaking – Retailers offer goods to customers in quantities that are appropriate
for individuals or households, for example one box of cereal instead of a box
containing 12 boxes of cereal.
Credit facility – Many retailers, for example Edgars, offer a credit facility to
customers, but some do not to prevent bad debt.
Other services – Retailers normally offer a range of other services to customers, such
as advice regarding the quality, features and usefulness of items. Some also offer free
or cheap delivery.
Risk-bearing – The retailer takes on some risks in offering products to customers.
These include the risk of fire, flood, or theft of the goods, deterioration in the
quality of goods while they are in storage or in the shop, and the chance that goods
will become obsolete, that customers’ tastes will change or that there will be changes
in fashion.

Display of goods – Retailers display different types of goods in a very systematic

and attractive manner. This helps to attract the attention of the customers and also
facilitates quick delivery of goods.
Supply of information – Retailers are a great source of information to their
suppliers regarding issues such as the behaviour, tastes, fashions and demands of
customers. This makes it possible for the suppliers to adapt and fine-tune their
product offerings.
Distinction between a wholesaler and a retailer

From the discussion above, it should be clear that wholesalers and retailers differ in both
their style and their function. The distinction is made in Table 1.1.
Table 1.1: Distinction between a wholesaler and a retailer

Wholesaler Retailer
Buys goods in large quantities Buys goods in small quantities
Buys goods directly from producers Generally buys goods from the wholesaler
Deals with a limited variety of goods Deals with a wide range of products
Requires more capital to start and run the Requires less capital to start and run the
business business
Sells goods for resale purposes Sells goods for consumption
Has no direct contact with consumers Has direct contact with consumers
No special attention is given to the decoration In order to attract the attention of customers,
of the shop retailers give more attention to the decoration
of the shop
Source: Business studies. Not dated. Lesson 20: Channels of distribution. http://www.nios.ac.in/media/
documents/Secbuscour/20.pdf (Accessed: 3 July 2012)
Sales intermediaries
Sales intermediaries are members in the distribution channel that link other members
but do not take physical title of the goods (unlike resellers). Their role can therefore be
seen more as that of a facilitator: they bring the buyer and seller together, creating value
for both in the process. An example of a sales intermediary is a bank employee who
arranges the finance and insurance for the purchase of a new vehicle. They do not take
ownership of the product, and nor does the bank, but they see to it that a relationship is
formed between the various parties involved.
Another example of a sales intermediary is an agent. Agents are individuals who
are authorised to sell a mix of products from several manufacturers (such as clothes,
household products and cleaning products) in assigned territories and are remunerated
by means of commission. They do not take title of the merchandise and generally do
not take custody of it. They simply act as a salesperson on behalf of the producers or
manufacturers. They also have very little freedom in negotiating prices or sales terms
for the products.12

Agents usually secure an order for a manufacturer and claim compensation afterward.
Unlike wholesalers, agents are not likely to take title of the goods, which means that
capital is not tied up. However, a ‘stockist agent’ will hold consignment stock, where the
agent stores the stock but the title remains with the manufacturer. This approach is used
in cases where produce needs to get into a market soon after the order for it is placed.
Benefits of using an agent

Benefits of using an agent include the following:13
Agents have substantial technical and market information and have recognised sets
of customers.
For a company that sells a product that demands seasonality, an agent can be an
asset because the vendor does not have to carry a year-round sales force.
Agents are paid on commission, therefore this alternative is cost effective for
a company with limited resources that may not be able to afford a full-time
sales force.
Disadvantages of using an agent

Disadvantages of using an agent include the following:14
Agents may be costly to train.
Even though straight commissions may be more financially viable, the wholesaler
may have little control over agents due to the physical distances involved; this may
also make agents hard to motivate.
Owing to the compensation method, it is common for agents to centre their
attention on their larger accounts, leaving minor ones to suffer.
Agents prefer not to spend a lot of time following up on sales, making special selling
efforts or providing manufacturers with market information, because this would
reduce their productive trading time.
Agents are less likely to provide consumers with parts or repair services quickly,
because they rarely maintain inventory.
The importance of distribution channels

Distribution channels are crucial to the success of a business. The main aim and function
of distribution is to get the right products and services to the right place, in the right
quantity, with the right quality, and at the best possible price, which provides time and
place utility to consumers.15 Channel decisions are critical because they determine a
product’s market presence and buyers’ access to it.16 Distribution channels serve many
functions, including facilitating exchange efficiencies, which will be discussed in detail
later in the chapter (see ‘Channel functions performed by intermediaries’).

The importance of distribution channels is highlighted by the following:

Customer satisfaction – There is no sense in producing or manufacturing a
product if the customer who needs it does not get it where and when they want it.
Consumers are under so much more pressure today and their time has become a
scarce commodity, which has led to their demands on companies and their products
growing exponentially over recent years. Distribution channels provide the means
of bringing the right product to the right customer, at the right place, in the right
quantity, and at the right price.17
Economies of large-scale production18 – In general, large-scale production can
be undertaken when the economy has a network of good distribution systems.
The benefits of production on a large scale are transmitted to millions through
distribution. Consider Makro, an organisation with a number of outlets in
South Africa trading in food, general merchandise and liquor. The volume of
products bought by Makro allows its customers to save when buying from them.
Similarly, companies such as Pep and Ackermans, each with many outlets, buy in
huge quantities – all of which need to be moved through distribution channels from
the points of manufacture (in, for example, China) to all the outlets across South
Africa.
Price stabilisation – Production mostly takes place in various parts of the country,
and distribution adjusts the demand and supply prices for each commodity by
creating time, place and possession utilities.19
Functions of a distribution channel

Although distribution channel decisions do not have to precede other marketing
decisions, they are a powerful influence on the rest of the marketing mix. Channel
decisions are important as they determine a product’s market presence and buyers’ access
to it. Intermediaries are introduced into distribution channel structures when their
specialisation facilitates the overall exchange process or to resolve certain discrepancies.
These discrepancies occur in the following cases:
Supply sources are geographically dispersed throughout the country, and a basic
need for physical transportation is created. The wine industry is predominantly
located in the Western Cape, but certain raw materials and equipment are
manufactured in other provinces and overseas. Wine consumers are also dispersed
all over South Africa. The transportation problem is further aggravated by the
fact that buyers distant from producers often require small product quantities. A
channel that delivers inventory nearer to the customer can close the spatial distance
between manufacturer and consumer and add value to the product being sold.20
Goods are manufactured in large quantities but retailers order smaller product
quantities, thus creating a timing discrepancy. Emphasis is subsequently placed
on the best timing of product flow through distribution channels via production
scheduling, just-in-time ordering systems, and inventory control procedures.21

A discrepancy of quantity and assortment exists because manufacturers produce

large quantities of single products, whereas consumers purchase in single units as
part of an assortment.22
In agricultural production and multi-manufacturing, goods are produced or grown
at substantially different times than when they are demanded. The consumer wants
the manufacturer’s product immediately rather than whenever the manufacturer
can supply it, thus there is a temporal discrepancy that a distribution channel can
solve by stocking the product. Intermediaries adjust and process products, and then
store them until they are needed or in a form that allows for long-term storage, such
as wine or cheese.23
Transfer of ownership of the goods from the manufacturer to the customer results
in discrepancies of possession, knowledge and/or ownership. They require that the
intermediary provide information about the items, and perhaps some temporary
credit, guarantees or adjustments in order to complete the sale.24
Distribution channels perform a number of functions, which will be discussed in the

next section.
Distribution channels close gaps and provide utility25

Channel activities, performed by intermediaries, fill gaps in form, time, place and
possession, and provide form, time, place and possession utility. Figure 1.1 illustrates
how channels of distribution create form, time, place and possession utility by closing
the six gaps of quantity, assortment, time, spatial distance, knowledge and ownership
between manufacturers and consumers.
Let us take a closer look at the way channels close the quantity gap. Tennis balls
are manufactured by the thousand, but consumers usually want only three or four at
any given time. Wholesalers and retailers buy tennis balls in batches of 100 packs of
three each and divide these into smaller quantities so that one customer can buy one
pack containing three tennis balls and not a whole batch (bulk-breaking). Wholesalers
and retailers also aggregate the consumer’s desired assortment of tennis balls, racquets,
covers, shoes, visors, socks and other tennis apparel.26
The creation of utility adds value to products and enables consumers to pick and
choose what they want. Form utility is created when a product is changed to fulfil the
needs of the consumer. Butcheries provide form utility by providing different cuts and
quality of meat products. Convenient locations and direct marketing methods create
place utility for the consumer through catalogue purchasing, home delivery and the
proximity of the convenience store ‘around the corner’. Buying and selling transactions
between retailers and consumers create possession utility because ownership of
products is transferred to the consumer. Retail trading hours and a wide product mix
create time utility because consumers can choose when, what and how much they want
to purchase.27

Form utility Time utility Place utility Possession utility

Quantity gap Time gap Spatial gap Knowledge gap
Bulk-breaking Storage and Transportation Sales promotion
Storage warehousing Materials Advertising
inventories handling
Packaging Personal selling
Financing Delivery Direct marketing
Order-taking
Expediting
Assortment gap Ownership gap
Accumulation or Intermediaries close gaps Buying and selling
aggregation of an between manufacturers and
Credit and financing
assortment consumers
Consumers receive value Collection and delivery
Grading
... and utility Service (eg product
... and closure adjustments, technical
service, warranty service)
Form utility Time utility Place utility Possession utility
Smaller assortment, In storage, paid Delivered to Product(s) received
graded and for – waiting to consumer by consumer
repackaged be collected and
delivered
Temporal closure Spatial closure
Supply = demand when they occur at Transporting goods from production location
different times, which is most frequently the to consumption location – provides place
case (eg agricultural mass production) convenience/utility
Figure 1.1: Providing utility and bridging gaps

Source: Cant & Van Heerden, 2010
Channel functions performed by intermediaries

In order for products to move from manufacturers to users, they must be handled,
packaged, assembled, stored, shipped, displayed, sold, and serviced. Each of these
activities involves costs and is performed by firms operating in the channel based on
their skills and efficiencies. Three main types of activities can be identified:
1. Transactional activities have to do with moving the goods through the channel,
such as pricing and promoting the products.
2. Physical activities include transporting, storing, sorting or repairing goods.
3. Facilitating activities ease the sale of the goods to end users by, for example,
providing advice on their use and assisting customers with financing the purchase.28

The three types of activities that intermediaries perform are summarised in Table 1.2.
Table 1.2: D
istribution channel functions performed by intermediaries within the supply
chain
Transactional activities Physical activities Facilitating activities
Buy products from sellers Store the products Assist with customer
Promote products to Transport products from financing
customers in various producers to consumers Grade product quality
ways (point of sale, Sort and package the and label accordingly
advertising) products Provide market
Absorb the risk of Divide products into information (marketing
product ownership smaller quantities (bulk- research)
(inventory risks, breaking) Advise customers
obsolescence risk) on product use and
Service and repair
Price products for resale products maintenance
Source: Lamb, Hair & McDaniel, 2012
We can also divide the functions performed by intermediaries into ‘transactional’

and ‘logistical’:
Transactional functions – As mentioned above, these involve (among other things)
contacting and communicating with prospective buyers to make them aware of
existing products and explain their features, advantages and benefits.29 Transactional
activities help to move goods and services along the distribution channel.
Logistical functions – Logistics refers to the efficient and cost-effective flow and
storage of goods, services and related information between and through channel
members.30 These functions include both physical and facilitating activities:
the transportation and storage of assets, as well as their sorting, accumulation,
consolidation and/or allocation for the purpose of conforming to customer
requirements.31 Intermediaries who categorise product offerings through sorting
them into need-satisfying product assortments resolve this problem through:32
–– Standardisation – collecting uniform products from alternative suppliers and
manufacturers, which are subsequently graded according to aspects such as
size, quality and weight33
–– Accumulation – assembling standard products according to aspects such as
size, quality and weight into large quantities for transport to other distribution
channel intermediaries34
–– Allocation – providing adequate supply of items such as tools, hardware, and
building materials for numerous customers35
–– Assortment – assembling specific goods into a customised order for specific
customer groups, which occurs in department stores that offer a merchandise
assortment consisting of clothing, appliances, hardware, furniture, etc – good
examples are Dion and Game36

–– Facilitating – research and financing, among other things: research provides

information about channel members and consumers, such as who the buyers
are, where they are located and why they buy;37 financing ensures that channel
members have the money to keep products moving through the channel to the
ultimate consumer.38
Intermediaries can reduce the costs of exchanges by performing functions efficiently39

– even if producers and buyers are in the same city, there are costs associated with
exchanges. The theory of efficiency of exchange says that it is more efficient to have
intermediaries involved in the distribution of products and services than for producers
to be directly in contact with consumers.
The example in Figure 1.2 illustrates that, without intermediaries, nine possible
contacts exist between three buyers and three sellers in a small town’s vegetable market.
However, if an intermediary sets up shop in this market, the number of necessary
contacts is reduced to six. This simple example illustrates that the efficiency of exchange
of using an intermediary increases with the number of buyers and sellers.
S S S S S S
Int
B B B B B B
3 x 3 = 9 contacts 3 + 3 = 6 contacts
B = Buyer S = Seller Int = Intermediary
Figure 1.2: An intermediary reduces the number of transactions

Source: Bothma, C, Grové, T, Nel, D, Strydom, JW, & Van Scheers, L. 2005
The mathematical expression for the efficiency of exchange ratio is as follows:40
Without intermediaries With intermediaries

(Number of buyers) × (Number of sellers) (Number of buyers) + (Number of sellers)
(3 × 3) = 9 (3 + 3) = 6
Efficiency of exchange ratio: 9/6 = 1.5
If there were 20 buyers and 20 sellers, the efficiency of exchange ratio would be:
(20 × 20) = 400 (20 + 20) = 40
Efficiency of exchange ratio: 400/40 = 10

Think how high the efficiency of exchange ratio must be for hundreds of specialised
sellers and buyers of fresh produce or clothing items in a city like Cape Town or
Johannesburg.41 Intermediaries are specialists in facilitating exchanges.42 They provide
valuable assistance because of their access to and control over important resources used
in the proper functioning of marketing channels. Critics who suggest that eliminating
wholesalers would lower customer prices fail to recognise that this would not eliminate
the need for the services that wholesalers provide. Other channel members would have
to perform those functions and still have to pay for them. Furthermore, all producers
would have to deal directly with retailers or consumers, meaning that every producer
would have to keep voluminous records and hire enough personnel to deal with a
multitude of customers. Customers might end up paying a great deal more for products
because prices would reflect the costs of less cost-efficient channel members.
In summation, intermediaries are important role-players within the supply chain.
They facilitate the flow of goods, services and related information into, through and
out of channel members.43 Table 1.3 concludes this discussion by illustrating the core
offerings intermediaries provide to their customers.
Table 1.3: Typical core offering and optional services by distributors to their customers
Typical core offering Typical optional services
One-stop shop – range and availability Sourcing of products
Back-to-back ordering
Simplifying supply logistics
Bulk-breaking Consignment stocking
Repackaging
Credit Extended credit, projected finance
First-level technical support (pre-sales) Second-level technical support
(post-sales) – effectively acting as an
outsourced provider of support
Technical training
Logistics – delivery Logistics – drop shipment to ultimate
customer
Order consolidation Project management – coordinating the
supply of several suppliers and shipping
to multiple locations
Product information collateral Marketing services – effectively acting as
outsourced provider
Source: Dent, 2008

The benefits, functions and activities performed by channel

members
To facilitate the movement of goods through the distribution channel, members take
on three specific main functions, namely transactional, logistical, and facilitating.
As indicated above, the best way of distributing products would be by using a direct
channel between the manufacturer and the consumer. That, however, is not possible for
the majority of products on the market today. Before the functions are discussed, the
benefits of channel members will be examined.
Benefits
The first benefit of having channel members is that this improves efficiency in
distributing products. If, for example, all retail outlets have to buy their goods
directly from the individual manufacturer, they will have to go to hundreds of
them. By just adding wholesalers, retailers can obtain a wide variety of products at
one place. If retailers only have to deal with one supplier, this reduces the number
of contacts, which brings down cost.
The second benefit is that channel members bridge the gap between an assortment
of products produced by manufacturers and the demand from consumers.
Manufacturers make large quantities of products that are mostly very similar
with a limited variety in the majority of cases. Consumers, however, want an
assortment of different products and in smaller quantities than are available from
manufacturers. Many channel members therefore sort and/or repackage products
into the assortment that customers want. Customers, for example, do not want first-
grade mixed with second-grade fruit. Channel members such as wholesalers and
retailers therefore gather a number of different products and make them available
to consumers in the format or form they desire.
The third benefit is that channel members reduce the cost of distribution by making
transactions routine. For many products, companies do not have to bargain over
every transaction, since orders are standardised in terms of frequency, delivery
and payment. The more routine a transaction becomes, the more the cost is
reduced. Retailers of consumable goods, for example, have fixed orders with their
manufacturers. Pick n Pay or Checkers, for instance, will have a contract with
manufacturers regarding order quantities and frequency.
Lastly, channel members help in the search processes from both the buyer’s and
the seller’s side. Channel members, for example, determine their customers’
needs on a regular basis. When customers are looking for specific products they
will be more likely to find them if a wholesaler or retailer has its products sorted
according to separate lines such as food, clothing, hardware and cleaning materials.
Manufacturers, on the other hand, can make their product more widely available
to their customers.

To obtain the above-mentioned benefits, channel members perform the three functions
– transactional, logistical, and facilitating – each of which will be examined next.44
Transactional function
This consists of buying, selling and risk-taking. These functions provide value in that
the channel members bring the manufacturer and the end consumer closer together.
Channel members buy products from manufacturers and then sell them to the consumer
or user. Part of the selling element includes the promotion and marketing of products
to consumers. Channel members also build relationships with consumers by being
the link between them and the manufacturers. Risk-taking involves the ownership of
the products, which transfers loss due to damage, theft or lowering of the value of the
product to other members in the distribution channel.
Logistical function
This is made up of concentration or rearrangement, storing and physical distribution.
This function facilitates the process of moving products and making them available in
the quantities and places in which they are needed. Concentration deals with a channel
member bringing different products from various producers together in one place where
customers can then acquire them. A retailer, for example, buys a number of different
products from across the world and then sells them to their customers at a central point.
Channel members can also ensure that enough products are available by storing them to
satisfy customers’ needs. Sorting deals with two aspects: bringing a number of the same
types of product together, and dividing products into smaller quantities (bulk-breaking).
A retailer can, for example, sell different brands of toothpaste, washing powder, etc; or
they can buy a large quantity of fruit and vegetables, and then sell it in smaller quantities.
Physical distribution includes the transportation of products from the manufacturer to
the place where it will be sold, inventory control and order management.
Facilitating function
This is made up of financing, grading and marketing research. Not all products can
be bought for cash by consumers, and channel members then provide financing
plans, purchasing agreements, credit facilities, etc, to facilitate the process. Channel
members can also provide financing by supporting and investing in storage capabilities.
Grading deals with physically inspecting and classifying products into categories.
Meat, for example, is divided into different grades according to its quality, and eggs are
graded on size. Marketing research refers to the process of gathering information on
customer behaviour, market size, and competitors, and providing the information to
management. Information is also shared upward in the distribution channel to ensure
that manufacturers produce products that customers want and in the right quantities.
All these functions lower the cost of distribution, and they increase market coverage,
the availability of money or cash flow, and end-consumer convenience. It must, however,
be stated that, due to the increase in consumer demand, the role of channel members
will change on a continuous basis.

Supply chain management

In today’s highly sophisticated markets, customers are demanding products that are
delivered when they need them and without any damage. The process that facilitates
this new trend is supply chain management (SCM). Owing to the rapid progress that
has occurred in the last few decades in distribution with improvements in transport
and technology, the way in which products are distributed has drastically changed.
Marketing channels connect marketers to their target market through a supply chain,
starting with the most basic raw materials and ending with the final consumer. Simply
put, SCM is the process of getting products from their raw or original state through the
distribution process to the end consumer, where they are either used or recycled.
Clothing, for example, goes through a number of stages before it arrives at the
retail outlet where it is purchased. With cotton, the farmer plants and harvests it, then
sends it to a factory where it is processed and made into fabric. This then goes to a
manufacturer who produces clothing, which is sold to a retail outlet, which then sells
it to the final consumer. Although this process sounds straightforward, it is quite a lot
more complicated, with more role-players involved than mentioned above. Consider,
for example, that cotton farmers need farm equipment and fuel, etc, and that clothing
manufacturers need sewing machines and thread, etc, to produce their products.
In the following sections, we will examine SCM and its impact on organisations.
We will begin by exploring the supply chain concept; thereafter other aspects such
as the principles, the pitfalls, the role of intermediaries and distribution channels
will be examined. Emphasis will also be placed on the value chain due to its importance
in SCM.
The supply chain

Definition of supply chain management
It is important to remember that SCM consists of a number of processes, and that it is not
logistics, although logistics is part of the supply chain process. A number of definitions
exist for SCM, and we will look at three different ones to get a better understanding.
The Global Supply Chain Forum defines SCM as ‘the integration of key business
processes from end user through original suppliers that provides products, services and
information that add value for customers and stakeholders’.45
A much simpler definition of SCM is that it is ‘an integrated process wherein a number
of various business entities (ie suppliers, manufacturers, distributors and retailers) work
together in an effort to: acquire raw materials, convert these raw materials into specified
products, and deliver these final products to retailers’.46
Another definition of SCM is the design and management of seamless value-
adding processes across organisational boundaries to meet the real demand of the
end customer.47
From these definitions it is clear that SCM is a process wherein different organisations
in the supply chain work with one another in getting products through the distribution
channel from manufacturer to final consumer. It is also important to note from the

above definitions that SCM entails all the members of the distribution channel, that it is
an integrated process, and that the aim is to add value throughout the chain. Figure 1.3
provides a simple example of what a supply chain might look like. However, it must be
noted that the figure only indicates a one-directional supply from raw material to the
final consumer. In most supply chains, the process is more complicated, and this will be
discussed in more detail later on.
downstream
upstream
Legend:
Material flow/ Raw materials Manufacturing Distribution Retailers/

transportation supplier plant centre customers
Figure 1.3: Example of a supply chain

Decision areas in SCM

From the above it is clear that supply chains deal with getting products from their raw
material state to the final consumer, while value is added throughout the process.
For the supply chain to work, organisations within it need to make decisions in five
areas, namely production, inventory, location or warehousing, transportation and
information. Each of these will be discussed to provide a better understanding.48
Production – This is the starting point, where the supply chain determines what
products the market wants and in what quantity. Part of the production process is
to plan the manufacturing requirements, quality control, workload balancing and
equipment requirements.
Inventory – The supply chain members need to stock enough products, whether
they are raw materials or semi-finished or finished goods, to ensure that demand
throughout the supply chain can be met. It is, however, important to remember that
a balance must be maintained between stocking too much versus too little, due to
the costs involved in keeping large amounts of inventory.
Location – Organisations within a supply chain need to decide where they will keep
the products that are required from the members in the chain. This decision deals
with the warehousing of products throughout the supply chain and ensuring that
the best possible paths are used so that products progress smoothly through the
distribution channels to the final consumer. ‘Paths’ refers to the means through
which products are moved through the marketing channels, and includes transport,
warehousing, inventory control, order processing, and product handling.
Transportation – Decisions need to be made on how products will be moved from
one supply chain location to the next. Organisations need to consider the options
available, be they air, truck, rail, or sea. Each option will most likely be evaluated
on cost, ease of use and product type. One would, for example, not transport fresh
flowers by sea from the Netherlands to South Africa, but rather make use of air due
to the nature of the product and time constraints.
Information – This is probably the most important area in SCM, and it is what
distinguishes today’s supply chains from those of the past. Organisations need
to decide what information will be shared with whom in the supply chain. For a
supply chain to be successful, information needs to flow continuously to make
sure that areas such as inventory, transport, warehousing and production work
to their optimal level. Manufacturers, which are at the top of the supply chain
most of the time, will be influenced by the market, which is ultimately the final
consumer. Demand information needs to come from wholesalers and retailers on
what consumers’ needs are so that the right amount of material can be acquired to
produce the right number of products for the market.

Characteristics of SCM
In SCM, a channel-wide inventory management approach is used instead of each
organisation establishing its own independent inventory management policy. By
integrating inventory systems, redundant inventory is eliminated.
To better understand SCM, we will now examine its characteristics, which are what
distinguish it from the traditional distribution of products.
1. Cost efficiencies – With SCM, a total channel-wide cost analysis is done,
which ensures that all channel members get total cost advantage. Analysis
includes key areas such as labour cost, most effective processes, capital
availability, lowest cost of capital, tax rates, and logistical cost. If an organisation
does not have an SCM system in place, they have to deal with each of these
areas themselves.
2. Time horizon – The relationship between organisations that make up a supply chain
tends to extend long after the contractual period. Relationships tend to be longer in
nature due to the integration of information and operating systems.
3. Mutual information-sharing and monitoring – The channel benefits if all members
have access to the information that is relevant to conducting business. Information is
not just disseminated from top to bottom, namely from manufacturer to consumer,
but the other way round as well. In non-SCM systems, information is only limited
to current transactions.
4. Coordination of multiple levels of the channel – Three types of coordination can
be distinguished: across channel members, across management levels, and across
functions. Top management of the different organisations in the channel will, for
example, do combined planning that influences all members of the channel. The
different managers in each member organisation will most likely also be in contact
with one another on a daily basis.
5. Joint planning – In SCM this is probably one of the most important characteristics,
since the focus is on the long term and not on one transaction. With SCM systems
there is a continuous process of planning, evaluation and improvement over
a number of years. Planning is not done just by the two organisations that are
just above and below each other in the distribution channel, but by almost all
the members.
6. Compatibility of corporate philosophies – In an SCM system, organisations should
have corporate philosophies and cultures that are closely related to facilitate smooth
operations. This, however, does not imply that each organisation’s operating
procedures must be the same or agree on every aspect. It just means that the
organisations can work together without conflict.
7. Breadth and supplier base – In traditional distribution systems, organisations rely
on a number of suppliers to provide products to get the best possible price. Another
reason is to ensure that if one supplier cannot provide the required products,
they can be obtained from other suppliers. An SCM system, however, follows

the opposite approach by limiting the number of suppliers, but building closer
relationships and coordination.
8. Channel leadership – SCM systems require that a team approach is used rather than
one organisation taking control of the channel.
9. Sharing of risk and rewards – SCM not only requires members to work closely with
each other doing shared planning and coordination, but also to carry a share of
the risk and rewards. Since the approach is long term, a win-win situation should
prevail with each member benefiting from the relationships.
10. Speed of operations – Information systems such as electronic data interchange
(EDI) can speed up operations. EDI and barcoding can, for example, help in the
flow of products on the distribution side through quicker picking and dispatching.
Traditional systems rely on ‘warehouses’ where large numbers of products are stored
to ensure that what is needed in the distribution channel is available, but this can
hamper the flow of products. With an SCM approach, however, ‘distribution centres’
are used. Owing to the continuous flow of information between channel members in
an SCM system, products are made available where and when they are needed.
The 10 characteristics of SCM have been discussed to provide a better understanding of

how it differs from a traditional distribution management system. We will now look at
the principles that guide it.
The value chain

The value chain was developed by Michael Porter in the 1980s,49 basically creating a tool
that can be used to identify how more value can be created in the distribution channel.
The model is built from where an organisation receives raw materials as input and then
adds value through manufacturing and other processes, finally selling the finished
product to customers.
The value chain is structured on the process view of organisations, where production
organisations are a system that is made up of subsystems. Each of the subsystems
has inputs, transformation processes and outputs, and involves the acquisition and
consumption of resources that consist of finances, materials, equipment, buildings,
factories, labour, administration, and management. How these activities are done will
have an impact on cost and profit.
Consider the number of activities it takes to make a product like a motor vehicle,
from buying raw materials and transforming them into all the necessary components
to assembling a vehicle. The original material goes through a number of steps, and each
time it becomes more useful.
As indicated above, organisations go through a number of activities in the process of
converting the inputs (eg iron, rubber) to outputs (motor vehicles, tyres, etc). These can
be classified into either primary or support (secondary) activities. Although the primary
activities will be discussed first, it is important to note that each activity contributes to
the value of a product.

Primary activities
Inbound logistics deals with the products that come from suppliers that are received,
warehoused and moved around within the organisation as needed in the production
or assembly line.
Operations are all the activities that are needed to change an input into an output, be
it products or services. For example, a metal coil that is brought into the production
process at a can manufacturer is finally transformed into a cold drink can that is
used by a cold drink producer. Operations can also refer to services, for example a
waiter bringing food and beverages to customers in a restaurant.
Outbound logistics deals with the produced product that is sent further in the supply
chain. These products need to be collected, warehoused and distributed. Using the
example of the can manufacturer, the products are packaged, placed on pallets,
warehoused, loaded on trucks and then sent to cold drink producers. After the cans
are filled, they are sent further in the supply chain to the various retail outlets who
sell them to the end consumers.
Marketing and sales are all the activities aimed at making consumers aware of the
products and getting them to buy them. This is done by means of the marketing
communication mix. Part of the activities is also facilitation of the buying process.
Service activities include everything related to maintaining the product or service
after it has been sold. These can include after-sales service, training, and installation.
Support activities
Procurement deals with the acquisition of materials, services and other resources
that make up the inputs required for production. Organisations will always strive
to streamline their procurement process to ensure the biggest cost savings while
maintaining quality. Procurement also deals with the outsourcing of certain
functions within an organisation, for example cleaning services, maintenance and
other non-core business functions.
Human resource management includes activities such as recruiting, training,
developing, remuneration and, if need be, the laying off of personnel. Since
employees make up a large part of an organisation’s expenditure, the process must
be well established and in line with the organisation’s objectives.
Technological development deals with the all equipment, be it hardware or software,
that assists the organisation in transforming an input into an output. In the
manufacturing of motor vehicles, for example, sections of the production line consist
of robots that do work such as welding and painting. Technology advancement is
one of the ways in which an organisation can get a competitive advantage over its
rivals in the market. One just has to think of the impact that the internet has had on
business and the way in which products and services are distributed.
Infrastructure consists of all the different parts, be it the accounting, legal, marketing,
sales, or general management departments that make up an organisation. All these
different parts help in the planning and control of an organisation.

Primary activities
Inbound Outbound Marketing

Operations Services
logistics logistics and sales
The value chain
Procurement Human resource management

Infrastructure Technological development
Support activities
Figure 1.4: The value chain
Figure 1.4 shows the value chain with the primary and support activities indicated.
From the figure it is clear that primary activities start with the inbound logistics and
end with services provided to customers. This is impacted by all the support activities
of the organisation. By changing the primary or support activities in the value chain, an
organisation can gain a competitive advantage in the marketplace. Organisations can,
for example, improve primary activities such as operations by acquiring new and better
machinery, or by using new marketing and sales tools.
If organisations use any value-adding activities in the value chain, the cost
implication should be taken into account. For example, using new technology or buying
new equipment could have a negative impact on profit margins, but profit margins may
increase if sales rise or if specific activities are streamlined.
SUMMARY
The distribution component of the marketing mix focuses on the decisions made in order to
make products available to consumers for consumption at the right time, in the right quantity,
at the right price and in the right place. In this chapter, we discussed the different types of
distribution channels that companies may follow, as well as their participants. Wholesalers and
retailers, which are important participants of the distribution channel, and their role in this
process were identified. The chapter concluded with a detailed discussion of the functions
performed by intermediaries within the supply chain.

Review questions
1. Explain what is meant by a distribution channel and compare it to what is
meant by a supply channel.
2. Why are distribution channels important? Also explain why they are important
to the various roleplayers.
3. Identify and discuss the different members of a distribution channel.
4. Explain and discuss the nature and importance of distribution channels.
5. Discuss in a practical manner the characteristics of a supply chain.
6. Identify and discuss the decision areas of a supply chain.
References
1 Panda, TK & Sahadev, S. 2005. Sales and Distribution Management. India: Oxford
University Press.
2 Cant, MC & Van Heerden, CH. 2010. Marketing Management: A South African Perspective,
5th ed. Cape Town: Juta.
Business Dictionary. 2012. Wholesaler. http://www.businessdictionary.com/definition/
3–4
wholesaler.html (Accessed: 3 July 2012).
5–6 Business studies. Not dated. Lesson 20: Channels of distribution. http://www.nios.ac.in/
media/documents/Secbuscour/20.pdf (Accessed: 3 July 2012).
7 One stop invention shop. 2011. Distribute your product to convenience stores. http://
onestopinventionshop.net/AboutUs/ArticlesByDon/conveniencedistribution.html
(Accessed: 3 July 2012).
8 eNotes. 2012. Wholesaling. http://www.enotes.com/wholesaling-reference/
wholesaling-174543 (Accessed: 3 July 2012).
9 Dalao, B. 2008. The ten types of wholesalers: Understanding their functions, strategies
and the role they play in it. http://www.groundreport.com/Business/The-Ten-Types-of-
Wholesalers-Understanding-Their-F/2868350 (Accessed: 3 July 2012).
10–11 Business studies, op cit.
12–14 Pride, WM & Ferrell, OC. 2012. Marketing, 16th ed. South-Western: Cengage Learning.
15 Scribd.com. 2012. International logistics management. http://www.scribd.com/
doc/7008516/International-Logistics-Management (Accessed: 8 May 2012).
16 Pride & Ferrell, op cit.
17–19 Bose, DC. 2010. Modern Marketing: Principles & Practice. New Delhi: PHI Learning.
20–24 Bothma, C, Grové, T, Nel, D, Strydom, JW, & Van Scheers, L. 2005. Distribution Management,
2nd ed. Pretoria: Van Schaik Publishers.
25–28 Cant & Van Heerden, op cit.
29–32 Lamb, CW, Hair, JF & McDaniel, C. 2012. Essentials of Marketing, 7th ed. South-Western:
Cengage Learning.
33–37 Cant & Van Heerden, op cit.

38–39 Lamb et al, op cit.

40–42 Van Heerden, op cit.
43 Lamb et al, op. cit.
Cant, MC, Strydom, JW, Jooste, CJ & Du Plessis, PJ. 2006. Marketing Management, 5th ed.
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Cape Town: Juta.
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Marketing Management, 29: 65–83.
Beamon, BM. 1998. Supply chain design and analysis: Models and methods. International
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Fawcett, SE, Ellram, LM & Ogden, JA. 2007. Supply Chain Management. Upper Saddle
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River: Pearson Education.
Hugos, M. 2006. Essentials of Supply Chain Management, 2nd ed. Hoboken: John Wiley &
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Sons.
49 Porter, ME. Competitive Advantage. 1985. pp 11-15. New York: The Free Press.

2: The concept of the value chain
and its relation to marketing 2
LEARNING OUTCOMES

yy Explain what the value chain is and its relevance to marketing
yy Discuss the concept of a value system
yy Differentiate between primary activities and support activities
yy Explain the role of marketing in the value chain
yy Discuss the three competitive strategies of Porter, namely the differentiation,
low-cost, and focus strategies
yy Explain the process for segmentation using the value chain
yy Discuss value propositions and the components of a value proposition.
Introduction
In considering the generally accepted principles of business that help to generate
shareholder value, there are some common principles that have become accepted
as business truths. These principles help guide many of the strategies adopted by
businesses to succeed in their competitive business environments. These principles
include the following:
The main driver of profitability for a business is the value the customer sees
themselves getting. The more a customer perceives themselves receiving value, the
higher margin they are willing to allow the organisation to achieve. A customer
can purchase a Louis Vuitton handbag from a high-end mall like Sandton City
and be happy with the purchase, especially if the customer perceives the aura of
exclusivity and brand image that a luxury brand gives them. They feel they got good
value. Likewise, a customer may buy a fashion t-shirt at MRP, which lasts only for
a season, and that customer may also see themselves getting value. The point is that
it is not about the price paid, the issue with customers is that they are willing to pay
for the value they want. Marketers need to remember this, because the theme for
this argument is that customers buy value, not price. All customers gladly pay more
for some products or brands, and as long as they see themselves getting the value

2: The concept of the value chain and its relation to marketing 25
they expected they are happy with the purchase. This applies to luxury products
such as designer handbags as well as to lower-priced products such as a bottle of
Mrs Ball’s chutney. The better value customers see, the more they are willing to pay.
To increase the returns of a business, the business must make sure it has high levels
of productivity. This is a very important point in economies like that of South Africa,
which have to compete in global markets and against world-class competitors. The
slang term for this is that business should ‘sweat the asset’ to ensure all assets are
operating at peak productivity to help it increase its returns from doing business.
Most businesses need to be able to show growth or the potential for growth to be
seen as an attractive business to invest in – whether a small restaurant that is making
waves with innovative food offers or a large beer company looking for shareholder
investment to expand into new geographic areas. In tough economic times and a
declining economy, it may be an achievement to meet the same level of sales as the
previous year, but the 0% growth will be a hard fact to overcome in potential investors’
minds. In business, everyone expects a business to show steady continuous growth in
its operations to be classified as a good business for investment.
The only way to keep generating good value, great productivity and sustainable
steady growth is through innovation in the business. Many smaller businesses break
into markets or succeed against larger competitors because they are more flexible
and innovative, and can respond more quickly to changes in the market.
Good management teams or individuals in small or large businesses need to
be performing in all these areas shown above to ensure both that their business
succeeds and that it shows sustainable growth over time to earn profits and maintain
those profits over time.
The key is value, and customer value in particular, and this is the focus of this chapter.
We will look at the foundation of ‘value’ thinking – the concept of the value chain –
and how it relates to the marketing processes of a business. Before you begin, try to
identify organisations that you feel are good at generating and delivering value to their
customers, as well as those that you feel are not good at generating and delivering value,
and try to drill down as to why they are good or not – what do they actually do to have
you think of them as successful or not at delivering value?
The value chain

The value chain describes the set of activities that an organisation follows in order
to design, produce, market, deliver and support its products and/or services in the
marketplace where it competes. The aim is to deliver value to the chosen customer
through a chain of related and interlinked activities. The concept of the value chain
was introduced by Michael Porter, a Harvard professor, in his 1985 book Competitive
Advantage. This concept has had longevity and is now standard in the vocabulary of most
business people. Most businesses today have the delivery of value to their customers as a
main aspect of either their mission or their objectives.

Competitive advantage and value chain

Porter’s view was that one cannot understand competitive advantage by just looking at a
business as a whole. If one looks at the retail banking sector in South Africa, we can see
that the banks have used colour associations as a way of generating brand identity. The
big four retail banks for years have been easily identified by these colour associations:
Absa – red
Standard Bank – blue
Nedbank – green
FNB – turquoise.
They have been successful at these colour associations, but the question is, does that
ownership of a colour linked to brand identity lead to a competitive advantage? It does
provide a tool that can be used in branding, but there are few if any customers that chose
their bank on the basis of its colour.
The definition of a competitive advantage according to Porter is something the
business does (notice, it’s about actions and activities) better than its competitors and
that counts for its customers. That last part of the explanation is the important part – it
must be important to the customers, and you must be better at it than the competition
in the customer’s mind. (There are other criteria for something to be considered a
competitive advantage, such as being difficult to copy and being sustainable, but we will
be focusing on the activities part of the explanation.)
One way of trying to understand this is by considering the popular adage ‘you’re
not what you say you are, you are what you do’. Porter emphasised looking at the many
specific activities that a business performs in the business it undertakes – such as
designing, producing, marketing, delivering, and supporting its products/services. All
these things cost money to do, but they can all be done in a way that is different from
the way the competition does them. In other words, a business can differentiate itself. If
these activities are important to the customer and, as a result of the differentiation, the
business is seen as better than the competitor, it may lead to a competitive advantage.
Let us consider the retail banking sector again. The bank brands have differentiated
themselves by the colour associations they have built over the years, but these are not
generating any competitive advantage, because the colour of a bank is not important to
its customers. This is the crux of Porter’s approach: to look at what a business does, and
how those activities interact, to understand the potential sources of differentiation and
competitive advantage.
We have been considering an individual business, but the value chain is part of
what can be seen as a value system – the system that the business is part of to deliver
value to markets. Think of a medium-sized business producing clothing for fashion-
conscious South Africans. Part of its value system would be the suppliers that deliver
and provide the inputs that it needs to operate – such as machinery, cloth, dyes, zippers
and the like. These inputs feed into the business – and are called upstream suppliers,
and must deliver value to the clothing manufacturer. The business then uses those
inputs to produce products/services, and delivers those to the channels it uses to reach

its customers (buyers) and final consumers – we call that downstream value. This is
illustrated in Figure 2.1, which shows the progression from suppliers (upstream value)
to the business and then downstream to its buyers and customers.
The The
Supplier The firm’s
channel buyer
value value
value value
chains chain
chains chains
Figure 2.1 A value system
Competition today is not between individual businesses, but can rather be seen as
competition between value systems. Consider a local fast-food outlet such as Chicken
Licken competing against KFC. There is obvious competition between the two, but the
real competition is between their value systems. We tend to see the direct version of
competition – their branding, the chicken taste, the advertisements, the pricing, and
their locations – but one also needs to see this higher level of competition to really
understand value and possible differentiation. This is especially true when dealing with
global companies, who put together best-in-world supply and channel chains. Think
of the value and power of an organisation such as McDonalds, and what it takes to
compete against them as Steers and Burger King have done.
The different types of activities

Porter in his model of the value chain identified two major types of activities that a
business designs and manages to drive value to its customers. These two types of
activities are primary and support activities.1
Primary activities
These are activities dealing with the actual creation of the product/service, the activities
around selling and getting the products/services to the customer, and the activities
dealing with any aspect after sales. They include the following:
Inbound logistics – These are activities associated with receiving, storing, and
disseminating inputs to the product, such as material handling, warehousing,
inventory control, vehicle scheduling and returns to suppliers. An example would
be the receiving and storing of tyres from tyre manufacturers at the Toyota car
manufacturing plant at Prospecton in Durban.
Operations – These activities are associated with transforming inputs into the final
product, such as machining, packaging, assembly, equipment maintenance, testing,
printing, and facility operations. In the Toyota example, this would include the
building of the cars in the plant.
Outbound logistics – These activities deal with collecting, storing, and physically
distributing the product to buyers, such as finished goods warehousing, material

handling, delivery vehicle operation, order processing, and scheduling. The cars
produced by Toyota at Prospecton must be delivered to local dealers as well as
international markets for Toyota products, such as other African countries.
Marketing and sales – These activities are associated with providing a means by which
buyers can purchase the product and inducing them to do so, such as advertising,
promotion, the sales force, quoting, channel selection, channel relations, social
media usage, and pricing. The recent launch of the new updated version of the
Hilux in South Africa is an example of the activities under this primary activity
group in the value chain.
Service – These activities relate to providing service to enhance or maintain the
value of the product, such as installation, repair, training, parts supply, and product
adjustment. The after-sales function of the Toyota dealer (parts and servicing of
automobiles), the warranty section of Toyota itself, and the trade-in function for
Toyota vehicles are examples.
Support activities
These support the primary activities and each other. They are often boundary-spanning,
in that they support all the primary activities and help ensure that the primary activities
achieve their objective – value delivery to the customer/buyer. They include the following:
Procurement – These activities include the function of purchasing inputs used in
the firm’s value chain, not the purchased inputs themselves. An example would be
the process of purchasing whatever is needed for the different primary activities
to perform as needed. Purchasing tablets and other similar products for the field
support teams of Toyota for supporting the dealer body and making sure they have
training in how to use them is an example.
Technology development – This range of activities can be broadly grouped into efforts
to improve the product and efforts to improve the process. This includes information
and communication technology. There are other important technologies, such as
materials technologies (new composite materials for Toyota dashboards that last
longer in South African conditions), process technologies (the use of robots in
the Prospecton plant), and management technologies (the use of Japanese quality
control methods such as Keizan and quality circles) are examples. Improving the
build quality has been a prime focus area for Toyota South Africa.
Human resource management – This consists of activities involved in the recruiting,
hiring, training, development, and compensation of all types of personnel. Making
sure there are competent machine operators and dealer staff that are customer-centric
and understand Toyota’s drive for a winning customer experience are examples of
this. Toyota South Africa has launched a customer experience initiative for all its
employees and the dealer frontline staff that emphasises the importance of a ‘winning’
Toyota customer experience, and to date has trained over 5 000 participants.
Firm infrastructure – These activities relate to general management, planning,
finance, accounting, legal, government affairs, and quality management efforts.

They support the entire chain and not individual activities, and help the primary
chain perform its main function. The new product development planning process
at Toyota helped to ensure the success of the updated Hilux launch, and is a good
example of this type of activity.
The design of these activities and the way they are performed are what lead to
competitive advantage – value activities are therefore the building blocks of competitive
advantage. In considering the example of Toyota used throughout the explanations
above, we can see that Toyota has built a competitive advantage through its production
(operations) and its dealer body in generating the perception of reliability that has led
to market leadership for more than 20 years. The challenge is to maintain and sustain
that advantage. A visualisation of the two types of activities as explained in the sections
above (primary and support) is shown in Figure 2.2. This gives one a process- or
activities-based view of a business and allows one to see what is done to deliver value
to customers.
Firm infrastructure
Support Human resource management

activities
Technology development
Procurement

Operations Service
Primary activities
Figure 2.2 A generic value chain

Source: Adapted from Porter, 1985: 37
The role of marketing in the value chain

Now that we have established the concept of the value chain and the different types of
activities, one could ask what the role of marketing is within this value chain. We have
explained that marketing is the set of activities associated with providing a means by
which buyers can purchase the product and inducing them to do so, such as advertising,
promotion, the sales force, quoting, channel selection, channel relations, social media
usage, and pricing. This is the overall aim of marketing – to generate interest in and to

facilitate the sale of the product/service. As shown below in Figure 2.3, this main aim
can be broken down into the constituent activities of marketing, but the performance
of the function of marketing and marketing-related activities is limiting in the view of
the role of marketing: marketing has a strategic role, a functional role and an integrative
role within the concept of the value chain.
Firm infrastructure
Human resource management
Technology development
Procurement

Operations Service
management
management
management
Social media
Distribution
Advertising
Promotion
Sales force
Marketing
Publicity
Pricing
Figure 2.3 The marketing activities
These three roles make the marketing function extremely important for the success of a
business, because without the performance of these three roles the likelihood of success
for a business will be seriously compromised.
1. The strategic role – Marketing is the function that should be closest to two
important inputs in terms of the strategic direction of any business, namely
customers and competitors. Marketing must analyse the trends affecting these
two important components of a business strategy and give the management team
all the information needed both to decide who the business will market to (target
segments) and to know who it competes against (competitors). These are strategic
decisions, and marketing rarely makes these themselves. This is highlighted in
Figure 2.4, where the analysis of the two components leads to the creation of a
successful value platform to offer the customers.

Customer analysis Competitive analysis
Customer groups Competitors to

to aim for target against
Analyse consumer Analyse competitors’

expectations strengths and weaknesses
Value
platform
Differential
advantage
Marketing programme
Positioning
Product
Distribution
Customer service
Promotion
Price
People
Process
Figure 2.4 The value platform
2. The functional role – Marketing must perform the activities related to the marketing
function in a business. This means the planning, implementation and control of
the marketing activities shown in Figure 2.3. This would include target market
selection, positioning the business, and managing the expanded marketing mix.
3. The integrative role – Marketing is not the most important activity in a business,
but it is the one that should make sure it integrates all the necessary components
to be able to achieve the business objectives in terms of marketing and sales. This
means that marketing management must have good cooperation and coordination
skills, as all the activities can help to deliver value to customers, and marketing
must make sure that there is alignment within the business to ensure success with
customers. This integrative role is illustrated by Figure 2.5. In terms of the value
system, we can use the Toyota example to illustrate this role. Marketing at Toyota
has to liaise with their supply chains to make sure all suppliers are aware of the
requirements needed in terms of product choice, quality and availability to make

sure the Toyota plant can make the cars in the manner and timing that is needed
in the marketplace. In terms of primary and support activities, marketing must
make sure that all activities in the organisation are working toward the same goal of
value delivery to the chosen customer segments. That means they must try to make
the value requirements of the chosen segments transparent to the different activity
groups so that everyone understands what the market wants and understands their
role in the delivery of value to customers. Marketing must make sure the inbound
logistics brings in the inputs in the manner and timing needed to ensure smooth
operations. It must work with operations to ensure that what is needed is produced,
and that the forecasts of sales are accurate to avoid cost escalations; it must work
with the service and customer experience function to make sure customers and
consumers are getting the correct winning customer experience from the channels
that they have chosen. In a service–product environment, marketing must ensure
that the human resources brought into the business have the correct service ethic,
and that finance budgets the correct amount to invest in product development to
maintain a cutting-edge product in the marketplace. The point we are trying to
highlight is that while marketing does not control all the other business functions
or activity groups in the value chain, it has to ensure that they are all on the same
page and working together to improve the likelihood of success for the business.
Production
Marketing
Human
resources Customer Finance
Figure 2.5 The integrative role of marketing
Marketing and Porter’s competitive strategies

Michael Porter wrote another book in 1980 called Competitive Strategy, where he
introduced the three strategies that he felt drove success in a market sector.2 Each had
its own advantages and disadvantages, and over time these three strategies have become
generally accepted options in terms of how a business competes. These three strategies
were the differentiation strategy, the low-cost strategy, and the focus strategy.

The differentiation strategy

Differentiation is about making the product or service physically or perceptually
different from competing products so that customers perceive it as different from
competing offers. In most cases the differentiation strategy is associated with a higher
price, because such a strategy usually makes price less important to the customer
because of the unique attributes that are built into the product. For it to be likely to
succeed, an attempt at differentiation should have three characteristics:
1. It should generate customer value.
2. It should provide perceived value.
3. It should be difficult to copy.
It is important that these unique attributes provide value to the customer and that
they are substantial enough for the customer to be willing to pay more for what the
differentiation offers. In other words, the consumer should be prepared to pay more for
the product because of these attributes. The way to ensure this is to develop the point of
differentiation from the customer’s perspective.
There are many ways of differentiating a product or service. General marketing
approaches to differentiation are used by most marketers to differentiate their offering
from those of competitors. These include:
Differentiation on the basis of product/service quality, such as Woolworths with its
food offering
Differentiation by brand, such as Kiwi shoe polish
Differentiation by unique product characteristics, such as Hansa beer being a
Pilsner
Differentiation by distribution, such as Avon using its agents to distribute its
products to its customers
Differentiation by marketing communication, such as Nando’s and its humorous
advertisements
Price differentiation, such as the Mr Price group
Differentiation based on consumer orientation, such as Outsurance wanting to
deliver outstanding service.
Porter suggests that one can take all the activities shown in Figure 2.2 and use them
to potentially contribute to differentiation. Procurement of raw materials can affect
performance of the end product and can thus lead to differentiation. Windhoek beer
has highlighted its use of pure raw materials in the brewing of its beer. Technological
development may lead to product designs that have unique product performance, such
as Apple products. Operational activities may affect product appearance and reliability,
such as the reputation Toyota has built based on long product runs and large volumes of
iconic car brands such as the Corolla. Amazon has differentiated itself through customer
service and its logistics system that delivers consistently and quickly. Marketing and

sales activities are another area of value chain activities that often have a major influence
on differentiation. For example, Nando’s has differentiated itself through its product –
flame-grilled chicken – as well as its topical and humorous advertisements.
Porter points out that a business may also differentiate itself by the breadth of its
activities, which he terms its competitive scope. Defy in South Africa is seen as one
of South Africa’s top consumer appliances marketers, as it offers a very wide range of
products and activities when compared to a smaller business that offers only a limited
range of products. A broad competitive scope can lead to a number of differentiating
factors, such as:
The ability to serve buyer needs anywhere, such as Vodacom and airtime
Simplified maintenance if spare parts and design are common for a wide line, such
as Toyota parts being available throughout Africa
A single point at which a buyer can purchase, such as Takealot at its website
A single point for customer service
Superior compatibility among products, such as with the Defy range of kitchen
appliances.
Porter also highlights that, in order to achieve these benefits, the business will require
consistency or coordination between its activities. Downstream activities, such as
distribution, could also lead to effective differentiation. Tupperware, Avon and Avroy
Shlain have chosen direct marketing as a method of differentiating themselves. Other
ways in which a business can differentiate by means of downstream activities include:
Channel selection to achieve consistency in facilities, capabilities, or image. Toyota
has Toyota Approved Panelbeaters that it encourages customers to use.
Establishing operational standards and policies for the channels or suppliers.
Woolworths is renowned for working with suppliers to improve quality and for
maintaining its strict quality standards.
Provision of advertising and training for channels. Toyota has spent a large amount
of funds in training its dealer force to improve their service delivery.
Providing funding so that the channels may offer credit. BMW has developed
innovative warranty packages and facilitated the purchase of extended warranty
through its credit facilities.
Porter3 notes that a business’s ability to sustain differentiation depends on two factors.
The first is the continued perceived value of the differentiation to the customers.
Secondly, the speed of imitation by competition will also affect sustainability. If there is
a lack of imitation, the product’s differentiation will be sustained for longer.

How to sustain the differentiation

We mentioned above that the idea is to be able to sustain the differentiation over time. There
are some conditions which can make it easier for a business to sustain its differentiation:
The business’s sources of uniqueness have barriers to competitors. The ability to be
innovative or to move first into a market or technology tends to sustain uniqueness
more than policy decisions designed to make the business unique. They are more
difficult to copy and easier to maintain by protecting the source of differentiation.
For example, De Beers is the only diamond mining company with access to the
diamond mines in Botswana.
The business has a cost advantage. If the cost advantage is sustainable, then the
differentiation will also be more sustainable. Mr Price was in the past able to
purchase better than its competitors and could offer great value clothes.
There are multiple sources of differentiation. This relates to how easy it is for a
competitor to copy the source of differentiation. The more sources of differentiation,
the more difficult it will be for the competitor to copy. The more the source of
differentiation is based on coordination of value activities, the more difficult it will
be for the competitor to imitate, since it will require many changes to their operating
systems and culture. This is one reason why the ability to provide good service is so
difficult to copy. An example of this is Capitec and its ability to deliver better service
than its larger, better-established competitors. The big four competitors just could
not copy the things Capitec did to separate themselves from the other banks.
The business creates switching costs at the same time that it differentiates. A
switching cost is a fixed cost that buyers must pay if they change suppliers. This
would allow the business to sustain a price premium even if its product is equal to
competitors’ products. The buyer would be reluctant to change suppliers because
of this switching cost, and this would enhance the sustainability of differentiation.
Pitfalls of differentiation
Many businesses that follow a differentiation strategy face common pitfalls, often as a
result of not understanding the underlying basics of differentiation. These pitfalls include:
Uniqueness that is not valuable. Just because a business has uniqueness in some
form does not mean that the business is then differentiated. The uniqueness must
be perceived and valued by buyers. A good way to measure whether the uniqueness
is valued by customers is to see whether the business can sustain a price premium.
Woolworths Food sells food products at a premium to many consumers, but its
customer base is willing to buy because of the quality of the products.
Too much differentiation. Care must be taken not to be too different. If the product
or quality levels are higher than the buyer’s need, then the business could be
vulnerable to competitors that may have the correct levels of quality and a lower
price. Mercedes-Benz was accused of over-engineering its cars and outpricing itself
in the market. BMW was able to outsell Mercedes-Benz, and the successful launch
of the new C-Class by Mercedes-Benz was a response to this threat.

Too big a price premium. Care must also be taken not to let the price premium
charged by the business become too large. This may lead buyers to re-evaluate
the value they perceive in terms of the differentiation, and the business could
eventually lose the customer because the value is not seen as appropriate to the
price premium that is charged. The use of streaming channels on the web means
that some television services may lose customers.
Ignoring the need to signal value. Value must be perceived by the buyer and
businesses must do all they can to bring this value to the attention of its customers.
A business cannot ignore this, because buyers are often not willing or able to see
the differences between suppliers. Reminder advertisements by Toyota that it is still
number one in South Africa are an example of this.
Not knowing the cost of differentiation. A business must be aware of the cost of the
differentiation activities that they perform. They need to compare these costs with
the price premium that they gain from the differentiation or the perceived value
attached to it by the buyer. A company should not assume that it should differentiate
just because the costs look like it makes economic sense.
Focus on the product instead of the whole value chain. Many businesses consider
differentiation only in terms of the physical product, and are unaware of the many
opportunities provided by the value chain for effective differentiation.
Failure to recognise buyer segments. A business with a lack of knowledge of their
buyers and the buyers’ purchase criteria and rankings will be vulnerable to a
competitor that does have that knowledge. Differentiation must be done in areas
that are of value to buyers, and only through customer knowledge and research can
a business gain the knowledge that it needs to effectively differentiate itself in ways
that are of value to customers.
The low-cost strategy

One of the most attractive positions for any business is to be considered the low-cost
producer in its industry. Businesses that follow a low-cost strategy concentrate on
lowering their production costs with the aim of lowering their prices to customers,
achieving productivity gains, or even investing in marketing to ensure that adequate
sales volumes are achieved. The competitive advantage of low-cost, low-price sellers lies
in their ability to produce products inexpensively and efficiently.
This strategy is based on the interplay between costs, prices, profit margins and
market share. There are two distinct directions that a business can take in order to earn
a profit.
Lower margins/higher share – Low-cost producers usually earn lower profit margins
than differentiated marketers, but they gain a higher share of the market. They may
lower prices and thus attain small margins, but they gain on the volumes that they sell.
Lower costs/higher margins – In this case, the low-cost producer tries to lower costs
faster than prices. This results in higher profit margins rather than a higher share
of the market. For example, many of the house brands sold by retailers sell for less

than national brands, but they earn higher margins for the retailers by lowering the
costs of the product.
There are many competitive advantages that could be gained by being the overall
cost leader. The high volumes that low-cost producers gain provide them with
bargaining power against suppliers. Customers would also have difficulty bargaining
against a business selling at the lowest prices. These lower prices would also make
substitute products less attractive. Lastly, many competitors choose not to compete
with the low-cost producers, and often leave the tow end of the market to the low-
cost producers.
There are a number of ways of reducing costs which, if successful, could lead to ensuring
a low-cost advantage. These include:
Simplifying product design
Experience advantages
Scale advantages
Fostering a low-cost culture
Production savings by means of:
–– lower material prices
–– low-cost distribution
–– labour cost savings
–– government subsidies
–– location advantages
–– innovative advantages
–– cheaper capital equipment
–– lower overhead costs.
The cost advantage

There are two ways of gaining a cost advantage over competition. One way is to control
the cost drivers to improve efficiency and control costs. When Nampak cut back on the
number of pack sizes it offered its customers, it decided to use standard packaging sizes
and not to offer customised packaging to its customers. The second way is to reconfigure
the value chain. In this case, one must develop and adopt better and more efficient ways
of designing, producing, distributing or marketing the product.
Note that both these approaches can be used simultaneously – successful cost
leaders gain cost advantages from a number of sources within the value chain. Cost
leaders continuously examine every activity to look for opportunities to reduce costs,
while the top management culture often supports this behaviour. Capitec rethought
the traditional ways of operating of the big four banks, and simply reconfigured the
value chain to have a sustainable business. They located closer to the customer, they

simplified how things were done and the products offered, they priced lower to ensure
a high volume of customers, and they improved the process of opening an account so
that it was done in real time and required only a current ID and a thumbprint.
Pitfalls of a low-cost strategy

Many of the mistakes made in terms of following a low-cost strategy arise from not
understanding the behaviour of costs. Some of the common mistakes include:
Focusing only on manufacturing costs – Many managers immediately think of
manufacturing to reduce costs, but a large proportion of total cost is often found in
marketing, development or infrastructure. The total value chain must be examined
to significantly reduce costs.
Ignoring the purchasing or procurement function – Many businesses often look only at
labour to reduce input costs, yet all inputs and the linkages between inputs and costs
must be examined. This is an area in which many businesses are finding significant
improvements by improving relationships with suppliers. This emphasises supplier
relationship management skills as important in managing costs.
Overlooking smaller activities – Attention is focused only on high-cost activities,
and sometimes little attention is given to lower-cost activities such as maintenance.
False perception of cost drivers – A good understanding of cost drivers and the value
chain is necessary to ensure that action is taken where the business can achieve
results. Misdiagnosing the cost drivers could lead to expenditure and management
attention to areas that may be ineffective in reducing costs, or may even worsen the
cost position.
Failure to exploit linkages – The business’s ability to understand its value chain and
cost drivers is underlined by the fact that many businesses rarely identify all the
linkages that affect costs. This could also lead to errors in terms of setting the same
cost-reduction targets for all departments when raising costs in some departments
could, in fact, lead to lower total costs.
Contradictory cost-reduction activities – The business must ensure that all its cost-
reduction activities work cumulatively to reduce overall costs. Many businesses
often adopt cost-reduction actions that work in opposite directions. For example,
a business may try to gain market share to gain scale economies, yet counteract
possible cost benefits by means of product proliferation and range creep.
Entry of lower-cost competitors – There is always the chance that a competitor with
even lower cost structures will enter the market and gain market share by offering
even lower prices.
Reduced flexibility – A business may have to invest heavily to gain efficiency and so
achieve lower production costs. This means that the business may tie itself to a single
way of serving the market, and may lose the flexibility to respond to market changes.
This may make it difficult to adjust to shifts in customer tastes. Heavy investments in cost
reduction could bind a business to a certain technology or strategy, leaving it vulnerable
to new technologies or customer shifts to something other than a cheaper price.

The focus strategy

A business may not be able to compete effectively in the marketplace because of either
internal constraints or competitive forces. One possible course of action for these
businesses would be a focus strategy. The objective of a focus strategy is to monopolise
a niche in the market. The niche can be defined in geographic terms, by specialised
requirements for the use of the product, or by special product attributes that appeal to
niche members.
The need to create a viable sustainable competitive advantage is, therefore, of
paramount importance in the focus strategy. There are many ways of achieving this,
including focusing the product line, targeting a segment, and concentrating on a specific
geographic area. Let’s take a closer look at these:
Focusing the product line – This involves, for example, choosing a specific line
of software (for example, document management and publishing programs) or
stocking only high-quality stereo equipment.
Targeting a market segment – This could involve meeting the clothing needs of
large people, for example, or providing a resort which caters for only a certain class
of holiday-maker (elite premium customers). Another way of targeting a market
segment is to concentrate on a specific geographic area, such as the developers of
a new fast-food concept choosing to open its outlets and operations by initially
concentrating on the Gauteng market only.
Targeting low-share competitors – This involves finding a specific portion of the
market that is extremely profitable or one that has been neglected by the big
competitors. For example, Douglas Green of Paarl has enjoyed tremendous success
in concentrating its efforts on the imported liquor market in South Africa, which
was overlooked by many of the large local competitors.
Advantages of a focus strategy

Avoiding distraction or dilution of strategy – When a business focuses all its
resources, skills and effort towards one goal and everyone in the organisation
supports the total effort, the business will match the market needs with its assets,
skills and functional strategies. The business’s efforts and marketing activities tend
to be diluted with a broad product line or numerous segments. Consider marketing
the full Defy Range, compared to finding a new brand in South Africa.
Allowing a business to make an impact with limited resources – Many businesses simply
do not have the resources to compete in broad product markets. New businesses
may have to choose to focus until they generate enough earnings to expand.
Providing potential to bypass competitor assets and skills – The business that focuses
can choose to compete on a basis that it selects and that may allow it to compete on
its own terms. The choice allows smaller businesses to take on the big guys, such as
an independent fast food producer taking on KFC on the basis of taste and lack of
oil-based cooking in its operations.

Providing a positioning device – The business may be able to identify itself with
a specific product line, segment, or geographic area. Ferrari, for example, is
synonymous with high-performance sports cars. Any effort to compete in broader
markets could damage the image that it has built up in this niche.
Reducing competitive pressures – The focuser can choose what segments or product
markets to compete in, and one of the factors to consider is the competitive intensity.
The business may choose to trade off potential sales volume for a less competitive
environment, such as a bubble gum marketer that chooses to compete in the
wholesale business only and not in retail. Or the gum manufacturer may choose to
compete on the coast because gum can withstand damp.
Conditions for an effective focus strategy

The following conditions indicate that a focus strategy could be an attractive choice for
a business:
The segment is big enough to be profitable.
The segment has good growth potential.
The segment is not crucial to the success of major competitors.
The focusing business has the skills and resources to serve the segment effectively.
The focuser can defend itself against challengers based on the customer goodwill it
has built up and its superior ability to serve buyers in the segment.
Marketing implications of a focus strategy

A number of important issues should be considered by marketers who are thinking
about using, or who currently use, a focus strategy.
First, the source of sustainable advantage for the focuser lies in the difference between
their segment and their competitors’ segments. In other words, they tailor their offering
to their specific segment, not the general market.
Secondly, there are major opportunities for marketers in trying to identify new ways
of segmenting markets. This may provide the business that successfully identifies a new
way of segmenting the industry with the chance to move first to take advantage of the
new segments.
Thirdly, a broad targeting strategy does not necessarily lead to a competitive
advantage. There must be advantages from competing in a number of segments for a
business to earn superior returns. These could be in terms of cost leadership through
scale or in terms of differentiation in a way that is attractive to many segments. Many
businesses that are broadly targeted often serve too many segments and are vulnerable
to the threat of a focuser, who identifies a clear positioning that can succeed in the
specific market.
Lastly, the above points emphasise the fact that a business’s segmentation and target
markets must be evaluated on a continuous basis. A number of factors can affect the
market over time, such as shifts in buyer behaviour and technological change. This
means that a business cannot assume that their historical segmentation methods and

Providing a positioning device – The business may be able to identify itself with
a specific product line, segment, or geographic area. Ferrari, for example, is
synonymous with high-performance sports cars. Any effort to compete in broader
markets could damage the image that it has built up in this niche.
Reducing competitive pressures – The focuser can choose what segments or product
markets to compete in, and one of the factors to consider is the competitive intensity.
The business may choose to trade off potential sales volume for a less competitive
environment, such as a bubble gum marketer that chooses to compete in the
wholesale business only and not in retail. Or the gum manufacturer may choose to
compete on the coast because gum can withstand damp.
Conditions for an effective focus strategy

The following conditions indicate that a focus strategy could be an attractive choice for
a business:
The segment is big enough to be profitable.
The segment has good growth potential.
The segment is not crucial to the success of major competitors.
The focusing business has the skills and resources to serve the segment effectively.
The focuser can defend itself against challengers based on the customer goodwill it
has built up and its superior ability to serve buyers in the segment.
Marketing implications of a focus strategy

A number of important issues should be considered by marketers who are thinking
about using, or who currently use, a focus strategy.
First, the source of sustainable advantage for the focuser lies in the difference between
their segment and their competitors’ segments. In other words, they tailor their offering
to their specific segment, not the general market.
Secondly, there are major opportunities for marketers in trying to identify new ways
of segmenting markets. This may provide the business that successfully identifies a new
way of segmenting the industry with the chance to move first to take advantage of the
new segments.
Thirdly, a broad targeting strategy does not necessarily lead to a competitive
advantage. There must be advantages from competing in a number of segments for a
business to earn superior returns. These could be in terms of cost leadership through
scale or in terms of differentiation in a way that is attractive to many segments. Many
businesses that are broadly targeted often serve too many segments and are vulnerable
to the threat of a focuser, who identifies a clear positioning that can succeed in the
specific market.
Lastly, the above points emphasise the fact that a business’s segmentation and target
markets must be evaluated on a continuous basis. A number of factors can affect the
market over time, such as shifts in buyer behaviour and technological change. This
means that a business cannot assume that their historical segmentation methods and

variables continue to apply – these need to be carefully reviewed on a regular basis.

Consider the music market and the swift changes in terms of channels and technologies.
This meant that a band producing music needs to consider the internet as a source of
distribution, especially for millennial consumers.
Segmentation and the value chain

We noted above that segmentation needs to be reviewed carefully, and that the value
needs of a customer or market may change over time. Porter identified a process for
deciding on segmentation, segmentation bases and the differentiation strategy for that
segment that is based on value chain thinking:
Determine who the real buyer is – The business should not choose a segment or
a group, but rather specific individuals in the segment or group, to see how they
identify the usage criteria wanted and the signalling aspects sought for value. For
example, there may be a specific segment in the coffee market that likes strong
aromatic coffee, but a coffee marketer would want to talk to an individual to get the
insight that a coffee needs to have a layer of ‘crema’ when made, as that is considered
a good coffee by coffee aficionados.
Identify the buyer’s value chain and the firm’s impact on it – The marketer must clearly
understand the possible impacts it can have on a buyer’s value chain to decide on
the value to offer, as well as how the buyer’s value chain may evolve over time. This
includes changes in the channels to reach the buyer and the linkages needed in the
marketer’s value chain to be able to meet the requirements of the customers.
Determine ranked buyer purchasing criteria – This means that the criteria used by
the buyer for both usage of the product and the signalling of value must be analysed
and ranked, so that the marketer can clearly identify the specific aspects of value
needed and how to signal to the buyers that the product/service can deliver these.
Assess the existing and potential sources of uniqueness in a firm’s value chain –
Once the criteria for usage and signalling is clear, marketers need to analyse all
the possible combinations of value that can be put together, as well as their costs.
They can then see how unique their value package is, and whether it is different
from other competitive offers. Marketers need to look at existing uniqueness as well
possible uniqueness to determine what specifically will be offered.
Identify the cost of existing and potential sources of differentiation – Financial analysts
need to help establish the cost–benefit ratios for each of the possible elements of
value identified in the previous step.
Optimise the delivery of value relative to the costs – This means that the marketer
should choose the configuration of value activities that creates the most valuable
differentiation for the buyer relative to the cost of differentiating. The marketer
needs to make the tough decision as to what goes into the general value package
and whether the organisation should rather maintain its lower profile.

Test the chosen differentiation strategy for sustainability – Reduce cost in activities
that do not affect the chosen forms of differentiation – this needs to be done
aggressively to free up funds. The marketer wants to build the most value relative
to the costs required to differentiate, so if there are activities that are not important
then the marketer can reduce or eliminate those costs immediately. Marketers
need to be ruthless here to free up funds to develop and strengthen the required
differentiation – any costs incurred in performing activities that are not important
to customers must be eliminated to ensure success.
The value proposition

The whole purpose of the steps discussed above is to clearly identify the value needed
to deliver to the customer so that the marketer is successful. This bundle of value that
needs to be delivered is called the value proposition. A generally accepted definition
of a value proposition is, in essence, what you are going to offer your customers that
is relevant and differentiated. These two criteria are the focus of the process in the
previous section – it must be relevant, otherwise it is not important and your offer
won’t be considered, and it must be differentiated from the competition, otherwise
the value offered is the same and that leaves only price as the tool that can be used to
separate your offer from others.
It does mean that a bit more information is needed to be able to develop a winning value
proposition, for which you will need answers to the following questions:
On what attributes do customers define value?
Who is the competition?
How well do we and the competition satisfy these requirements?
Where are the opportunities to add value?
Where do we waste resources by focusing on irrelevant attributes?
Note the linkages to the value platform shown in Figure 2.4.
Components of the value proposition

In developing a value proposition, something the segmentation process can help
with is to identify the possible risks perceived by a customer, and what would have
to be included to be able to manage those risks for the customer to meet the ranked
purchasing criteria. There are many risks faced by customers, such as:
Functional risk – The product does not perform to expectations.
Physical risk – The product poses a threat to the physical well-being or health of the
user or others.
Financial risk – The product is not worth the price paid.
Social risk – The product results in embarrassment.

Psychological risk – The product affects the mental well-being of the user.
Time risk – The failure of the product results in an opportunity cost of finding
another satisfactory product.
The marketer needs to understand which of the risks are functional in the buyer’s mind
and make sure to address them in the development of the components to include in the
value proposition. These components are shown below.
Product
What value is our product offering in terms of features and benefits?
Merchandise mix
Packaging
Labelling
Product attributes
Service experience
How are we delighting customers with consistent service levels?
–– Servicescape – the design of how and where service is delivered
Customer experience
Branding
What do they get from the brand name?
–– Image
–– Associations
–– Architecture (brand)
Format/environment
How convenient are we making it for customers to access us and our products?
–– Physical distribution
–– Logistics
–– Location
Relationship interaction
What value are we providing when we interact with customers?
What is the lifetime value of these customers?
How do we consistently enhance value for key customers and buyers?
This is not an exhaustive list, but serves to show the choices available and what can
be used to deliver value to chosen customers. One needs to constantly update the
requirements for winning in the customer’s mind and prepare to repeat it, and then
repeat it again. Figure 2.6 shows the core components needed to be able to deliver value.

Products
Services Core
Expertise
Figure 2.6 The components needed to be able to deliver value
A successful marketer needs to be careful to constantly update the value components

that win for them and make the necessary changes to be both relevant and differentiated.
In simple terms, the marketer must know what makes their company famous in the
customer’s eyes, and analyse whether it is still good enough, as customers and marketers
work in a constantly changing environment. Only by using a value proposition that
is relevant and differentiated can the marketer develop the marketing mix to deliver
the value and achieve the position they need to be able to compete successfully. This
statement is backed up by the 2013 definition of marketing by the American Marketing
Association, which defines4 marketing as:
the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients,
partners, and society at large. (Approved July 2013).
We see the core concepts of the chapter come through here: marketing is an activity (as
per Porter’s value chain), and it is about creating, communicating, and delivering value
to customers and other stakeholders.
SUMMARY
The chapter began with a brief introduction of some general business principles emphasising
the importance of value. The chapter then explained the concept of a value chain and its
relevance to marketing, as well as highlighting the understanding of the value system as
a way of seeing the whole scope of the participants in the value system. The chapter then
showed Porter’s view of a value chain for the organisation, and the differences between the
two types of activities, namely primary activities and support activities. The three major
competitive strategies linked to value chain as identified by Porter were then discussed
(differentiation, low-cost and focus strategies), as well as the process for segmentation using
the value chain. Lastly, the concept of a value proposition and the components of a value
proposition were presented.

Review questions
1. What is a value chain, and why is it important to marketing?
2. Who are the players in a typical value system?
3. What are the different activities identified by Porter in a generic value chain?
4. What are the three roles of marketing in the value chain?
5. What are Porter’s three competitive strategies? What are the advantages and
disadvantages of each?
6. How can the value chain be used for segmentation?
7. What is a value proposition, and what components are usually included in
designing a value proposition?

CASE STUDY5
Made-in-China Fashion Becomes So Last Season
SA’s APPAREL MAKERS HAVE geared up to help shops meet the fast-changing tastes of consumers.
Demanding customers and intense competition from international chains have forced South
African retailers to become more agile, with a resulting boost for local manufacturers. Etienne Vlok,
director of the South African Clothing and Textile Workers Union, said the custom of South African
retailers buying their goods from China and other Asian countries was changing.
‘The factory-gate price was cheaper there, but then they did not factor in the cost to the
environment of importing these goods, the additional costs of the long lead times, including
when replenishing stock,’ he said.
Other issues were the financing of overseas buying operations and addressing quality or other
problems with suppliers thousands of kilometres away.
Vlok said local retailers suffered because their ‘Made in China’ business model meant they
could not respond quickly to changing consumer trends, unlike their international competitors,
who could change stock almost every two weeks.
So South African retailers had increasingly switched to local or regional suppliers, which was
also helped by government policies aimed at improving the industry’s competitiveness.
Vlok said currency swings over the past few years meant the price gap between imported
and local apparel had narrowed, giving retailers further incentive to invest in the production
sector. TFG, the most diversified apparel retailer with 22 brands including Foschini, Sportscene,
and Charles & Keith, has invested substantially in its local supply chain and built a design centre
close to its head office in Cape Town. Its local supply chain division includes wholly owned apparel
manufacturer Prestige Clothing, which has factories in Maitland and Caledon in the Western Cape.
Prestige Clothing head Graham Choice, who also leads TFG’s design and manufacturing divisions,
said 40 % of the group’s women’s apparel was produced locally. Prestige’s two factories produced
a total of 260 000 units a month .
‘In 2013, 3 % of four million garments were produced on QR [quick response] time and by 2016,
40 % of approximately six million garments were produced on Quick Response time, equating to
about 2–4 million garments,’ said Choice.
He said that TFG’s focus was to provide its many retail brands with clothes geared to current
fashions. Items could be on store shelves within two months of being designed. For ailing retailer
Edcon, going local may be the answer to its woes.
Edcon sources about 50 %–55 % of its merchandise locally and plans to increase this. As part
of its restructuring process, it is jettisoning international brands from its merchandise mix and
deepening its focus on local brands.
Edcon subsidiary Celrose, an apparel manufacturer, mainly produces mid- to high-end woven
garments. The Tongaat-based company employs 1 327 people, and has expansion plans that could
result in more than 400 new hires.
Edcon is a member of the KwaZulu-Natal Clothing and Textile Cluster, a public–private sector
partnership of clothing, textile, footwear and retail firms which was established in 2005 to boost
the competitiveness of the local industry.
Woolworths, which owns Australia-based brands such as Witchery and Country Road, said it was
driving a ‘local renewal strategy’ through its import replacement programme. This, the company
said, had a strong supplier development component that helped smaller local manufacturers get
established.

Susie Squire, group head of communications at Woolworths, said the group bought most of its
goods in Southern Africa, with food and clothing originating in South Africa, Lesotho, Swaziland,
Mauritius and Madagascar.
‘The benefits of locally sourced products include shorter lead times and reduced markdowns,’
Squire said.
Proximity to manufacturers also allowed ‘quicker responses when it comes to changing styles
of clothing in production’.
But the move to local production has yet to give local retailers the edge in their ‘fast fashion’ rivalry
with international chains, which still appear to be able to respond more quickly to fashion volatility.
‘International retailers such as Inditex and H&M have shown this,’ said Vlok. Spanish-based
fashion group Inditex owns Zara, which opened its first store in South Africa in 2011.
‘A significant portion of the products found in Zara stores in South Africa are made in Spain,
Portugal and Turkey, countries with much higher costs than most Asian ones,’ Vlok said. ‘But the
efficiencies in Zara, including its use of QR, means the company is still hugely profitable.’
Amelia-May Woudstra, spokesperson for the South African operation of H&M, said the Swedish
retailer could not discuss details of costs or business strategy, which had to remain confidential.
But she did say some elements of H&M clothing, such as headwork, were made in Ethiopia, which
allowed a quick response time. H&M has more than 3 900 stores across 61 markets.
Vlok said labour practices should remain central to the local industry’s drive to improve its
speed in keeping up with changing fashion trends. Clothing manufacturers got a shot in the arm
from retailers ordering more merchandise locally, but working conditions were still tough, he said.
Vlok said retailers had to be ‘acutely aware’ of conditions on the factory floor, because the union
and the sector bargaining council had been bringing the issue to their attention for many years.
‘If retailers claim not to be aware, it is purely because they choose to close their eyes and ears
to it. Retailers have to be aware, taking into account the [reputational] damage it can do to their
brands and even their share prices.’
But Liezel Johnson, a financial manager at Cape Town clothing design and manufacture
company Influence Clothing, said retailers might not always know about the factory conditions in
which their products are made.
‘I don’t think they are always aware of what the conditions are – they just want good-quality
garments at the best prices,’ she said. Many of the workers were home-based, which made them
difficult to monitor.
‘Some of them are working in very difficult situations – just working from hand to mouth.’
Influence Clothing, which mainly focuses on activewear, had an average turnaround time of 22
working days from manufacture to delivery, Johnson said. ‘We are in a fast-working industry
and situations change very quickly. We strive to give the best quality in the best possible
turnaround time.’
Source: Adapted from Tshandu, P.V. Feb 12, 2017. Made-in-China fashion becomes so last season for
local retailers. Sunday Times, Business Times: 3
Questions
1. Use the value system concept to analyse the specific players in the retail value system . What
are the issues identified at each step of the system from the case study?
2. Identify the components of a likely value proposition from a retailer such as TFG.
3. Using the typical retail value chain, explain the problems faced by a retailer such as TFG. What
linkages would be needed within the value chain to maximise value delivery?

References
1 Porter, M. 1985. Competitive Advantage. Cambridge: The Free Press: 39.
2 Porter, M. 1980. Competitive Strategy. Cambridge: The Free Press.
3 Porter, 1985, op cit.
4 AMA. 2013. About AMA – Definition of Marketing. https://www.ama.org/AboutAMA/
Pages/Definition-of-Marketing.aspx (Accessed: 15 January 2017).
5 Tshandu, P.V. Feb 12, 2017. Made-in-China fashion becomes so last season for local
retailers. Sunday Times, Business Times: 3.

3: Marketing distribution channel
value-adding activities 3
LEARNING OUTCOMES

yy Describe the place of the marketing distribution channel within the marketing value
chain
yy Identify marketing value chain members in South Africa
yy Elaborate on the following as marketing value chain members in South Africa:
–– the manufacturer
–– the wholesaler
–– the retailer
–– the spaza shop
yy Illustrate the marketing value chain of a product.
Introduction
This chapter focuses on the place of the marketing distribution channel within the
marketing value chain and the value that marketing value chain members add while
delivering products to the customer. A marketing distribution channel is a set of
interdependent actors involved in the process of providing a product or service to the
final consumer. Marketing distribution channel activities link with the marketing value
chain to attain this goal.
The marketing distribution channel is a component of the marketing value chain.
Marketing distribution channels provide utility of place, of time, of convenience, and of
possession: products are where the customer wants them, when they want them, they
are easy to get, and the customer knows when the product is theirs.
The marketing distribution channel within the marketing

value chain
A marketing value chain includes the activities of production, marketing, and
distribution to deliver products to the final consumer.1 A company, for example

Coca-Cola, manufactures soft drinks – their marketing value chain will start with raw
materials such as syrup, caramel colouring and their secret flavouring mixture. The
marketing value chain network outlines all the distribution channels linking value
chain members with the final consumer.2
The main aim of the marketing value chain is to develop competitive advantages
for a company. Michael Porter3 first described the value chain as that which gives a
company the ability to create value that exceeds the cost of providing its good or service
to customers. A marketing distribution channel, on the other hand, focuses on getting
the product to the final consumer. Marketing and sales are activities which motivate a
customer to buy the company’s product. In the global marketplace, selling a product
is sometimes easier than delivering it to the customer. Companies need to establish
the most cost-effective way to deliver products and choose a distribution channel.4
The distribution channel forms part of the outbound logistics to distribute products or
services to the final consumer. Figure 3.1 shows where distribution channels fit into the
marketing environment.
Distribution channels
Product/
Market Distribution Transactional/
Communication service
characteristics channels operations
attributes
External forces
Political factors, economic factors, social/lifestyle factors, technological factors,
demographic factors, cultural factors, educational trends, competition
Figure 3.1 Distribution channels in the marketing environment
Marketing distribution channels can be defined as pipelines through which goods

and services flow from the producer to the final consumer. The most basic marketing
distribution channel is a direct flow from the producer to the consumer: for example,
Hannover Life Reassurance Africa Limited is an insurance company that markets life
insurance directly to the final customer.5 Indirect distribution is a distribution channel
which includes independent but mutually dependent intermediaries. Environmental
and marketing trends in a country cause a unique distribution channel structure to
form in that country. However, there will also be similarities to distribution channels of
countries which are at the same stage of economic development.6

3: Marketing distribution channel value-adding activities 51
A marketing distribution channel is a network of channel participants, such as producers,

manufacturers and intermediaries, that perform various functions to deliver products.
Marketing distribution channels create place, time, convenience and possession utility.
There are four basic distribution channels in South Africa:7
1. In the first distribution channel, the producer markets directly to the customer.
An example is Tupperware, which uses the party system to distribute its plastic
containers directly to the final customer. Another example is Nike, which sells
directly to consumers by using an internet channel. This type of distribution channel
is fast becoming a popular channel, as the final customer enjoys the interaction with
the producer as well as the lower costs.
2. In the second distribution channel, the producer, for example Dairybelle Cheese,
markets directly to large-scale retailers such as Pick n Pay.
3. The third distribution channel is where the wholesaler is included in the
distribution channel, for example if Colgate delivers products such as toothpaste
to the wholesaler.
4. The last distribution channel consists of the manufacturer, the wholesaler, informal
retailers and the customer. This channel delivers products in small quantities, such
as one cigarette to spaza shop customers.
A new trend in South African distribution channels is the way the internet has created
new channels. For example in the tourist industry small hotels have the opportunity to
reach global customers. The internet forms the perfect distribution channel for small
hotels as the cost is very low.
The delivery path, or marketing value chain, of a product or a service can be divided
into three elements – the production end, the throughput process, and the receiver end
– which should be integrated to ensure smooth delivery of products and services.8
Take for example a waiter at a take-away restaurant in South Africa. There are
different ways to look at the part the waiter plays. He can be considered as part of the
product or service. He could also be responsible for the throughput process between the
production end and the receiver end.9 Any problems experienced by the customer can
damage the customer experience, and that is why the three elements of the delivery path
should be designed to collaborate with each other in perfect harmony.
External factors such as political, economic and social lifestyle factors influence the
distribution channel structure of a country and will be outlined next.
Political factors
Political factors have a large influence on the regulation of marketing distribution
channel members and the spending power of consumers. You can ask the following

questions to determine the impact of political factors on marketing distribution

channel members:
What is the government’s policy on the economy?
What is the government’s position on marketing ethics?
How stable is the political environment?
Will government policy influence laws that regulate or tax your business?
Does the government have a view on culture and/or religion?
Is the government involved in trading agreements such as the European Union?
Economic factors
Marketing distribution channel members need to consider the position of the economy
in both the short and the long term to establish the impact on their products. You can
ask the following questions to determine the impact of economic factors on marketing
distribution channel members:
What is the interest rate and how does it change?
What is the inflation rate and how does it change?
What is the employment level per capita?
What are the long-term prospects for the economy, for example Gross Domestic
Product (GDP) per capita?
Socio–cultural factors
The social and cultural influences on marketing distribution channel members vary
from country to country. You can ask the following questions to determine the impact
of socio–cultural factors on marketing distribution channel members:
What do you think is the dominant religion of the country?
What do you think are attitudes to foreign products and services?
Do you think that language will impact on the flow of products?
Are gender roles prescribed in the society? If so, what are the roles?
Physical factors
Physical factors are scarce resources such as water and fossil oil, as well as pollution
and environmental damages. The world’s fossil oil resources have decreased as a result
of fast-growing economies like China (most recently) using more energy in producing
products. The Kyoto agreement on pollution and the environment came into effect in
2005. This is an agreement whereby most governments throughout the world agreed
to reduce carbon pollution to protect the atmosphere. Greater social awareness and
government commitment to reducing pollution will put pressure on businesses to
display greater environmental responsibilities. Other factors are the growing numbers of
commuters (which places high demands on infrastructure), more people working from
home, and geographical shifts in population, for example the growing urban population

as people move to cities for economic opportunity. You can ask the following questions
to establish the impact of physical factors on marketing distribution channel members:
How does the country protect its scarce resources?
How will the country cope with the increasing problem of more commuters?
Did the country’s government sign the Kyoto agreement on pollution?
Global factors
Global factors include the threat of imported goods to local businesses, strict
import taxes, export opportunities and offshore investment opportunities
for marketing distribution channel members. You can ask the following questions
to establish the impact of some global factors on marketing distribution
channel members:
Does the country have strict import taxes for international businesses that want to
export goods to the country?
How does the government protect local businesses from the imports of international
products?
Technological factors
Technology changes quickly, and marketing distribution channel members should
adapt with these changes to ensure their competitive advantage. You can ask the
following questions to establish the impact of some technological factors on marketing
distribution channel members:
Does the existing technology offer consumers and businesses more innovative
products and services, such as internet banking, smartphones, etc?
Does the existing technology allow for products and services to be made more
cheaply and to a better standard of quality?
New communication and technology trends such as internet marketing impact

greatly on marketing value chain members. The traditional approach to the marketing
value chain, where product and information flow from producer to manufacturer
to retailer to consumer, is out of date and needs to change with new consumer
trends. Companies also experience challenges on how to integrate digital marketing
activities into their current supply chain, distribution and retail strategies. For example,
companies can use social media, mobile phones and electronic billboards in their digital
marketing strategy.
Other external factors

Marketing value chains also experience problems with global changes in consumer
behaviour, demographics and economics, and the new trend is to focus on collaborative
value networks instead of value chains. A new distribution channel trend in South
Africa is that companies are moving away from a plant-level production approach to

a demand-driven approach. Under a demand-driven approach, the company focuses

on the customer without sacrificing operational efficiency. They therefore research
what consumers want and provide it, instead of producing products and then trying to
sell them.
Marketing distribution channel members and the value

they add
Marketing distribution channel members, for example the manufacturer, the wholesaler
and the retailer, execute two types of activities, namely value-adding activities and
non-value-adding activities. Examples of value-adding activities are manufacturing,
assembling, and disassembling parts or materials. These activities enhance product
values. Examples of non-value-adding activities are loading and unloading, inventory,
inspection, material handling, rework, etc. These activities do not create value but they
are performed several times a day, and they require labour and IT systems to carry out.10
Manufacturers
A manufacturer is a marketing distribution channel member that transforms raw
materials into products, adding value in the process.
The manufacturer controls activities such as production output, inventory levels,
staffing levels and costs to add value in the marketing distribution channel. A new
South African trend in manufacturing is an increasing focus on services in order to
enhance customer relationships, develop new sources of revenue and resist product
commoditisation through service-based product differentiation.11 Commoditisation of
products is when consumers attach economic value to these products and experience
them as unique.
The challenge for manufacturers is to understand how changes in the marketing
distribution channel such as retail and distribution consolidation, internet retailing and
the creation of buying groups impact on their value-adding activities.
Although manufacturers and other marketing distribution channel members such
as wholesalers and retailers have the same final customer, they have different objectives
and different value-adding activities, which creates tension within the channel. While
manufacturers seek to maximise brand distribution intensity, retailers prefer less
intensive manufacturer brand distribution and inter-brand competition.
The trend in South Africa is that large retailers such as Checkers purchase directly
from manufacturers to save resources. The negotiating power of these types of retailers
is so strong that the wholesaler is being eliminated from the South African distribution
channel structure. The manufacturer further weakens the competitive position of the
wholesaler with the formation of depots (forward vertical integration). These depots
supply products directly to informal retailers, for example spaza shops, and are also
thus eliminating the wholesaler from the South African distribution channel structure.

Manufacturer value-adding activities

Value-adding manufacturing is a management concept which strives to improve
manufacturing activities through identification and progressive elimination of waste. A
value-adding activity either transforms or adds value to a product.
The process of adding value can be described as successful if a customer is willing to
pay for the final product.
Imagine you are building a Toyota car. Currently, your manufacturing and
distribution processes cost more than the final value of the car, thus your manufacturing
activities are not adding value to the final product. You need to add more value, which
you can achieve by changing the design of the car.12 Manufacturing processes consist
of two processes, those that add value and those that add no value, as illustrated in
Table 3.1.
Table 3.1 Manufacturing processes

Manufacturer activities Manufacturer services Transportation activities
(non-value-adding) (value-adding) (non-value-adding)
Packaging Manufacturing Transportation
Financing Assembling Loading and unloading
Overproduction Disassembling of parts or Inventory
Defects materials
Processing Production
Waiting time Waste management
Inspection
Insurance
The manufacturer should strive to add value in the production process because only
then can it be successful in the marketing distribution chain. The marketing value
chains of rooibos tea and maize will now be illustrated.
Figure 3.2 illustrates the marketing value chain of rooibos tea in South Africa.
Rooibos tea can be consumed as herbal tea or as extracts which can be added to food
for colouring or to medical and pharmaceutical products. Figure 3.3 illustrates the value
chain of maize in South Africa. Maize can be consumed as green maize or it can be
milled. During the milling process, the maize kernel is processed by two industries,
namely the wet and the dry milling industries. During the dry milling process, the maize
kernels are refined to maize meal; the products that can be derived from this process are
samp, maize grits, maize rice, and different types of maize meal. Wet milling is a process
that is carried out in water, during which pure starch is obtained from maize. The kernel
is separated into its components, namely the husk, starch, gluten, and the germ.

Packaged tea bags

Herbal (blended or unblended)
tea
Food related applications

(colourants, antimicrobial)
Rooibos tea
Medicinal and
pharmaceautical products
Extracts
Ready-to-drink beverages
and nutraceuticals
Cosmetic and personal care

Fruit juice mixtures
products
Figure 3.2 The marketing value chain of rooibos tea

Research and biotechnology
Input suppliers
Farmers/producers
Silo owners
Traders and Import and

transport export market
Local market
Animal feed Other processes

Maize milling industry
industry (wet milling)
Retail/wholesale
Consumer
Figure 3.3 The marketing value chain of maize

Wholesalers
Wholesalers are distribution value chain members that buy completed products from the
manufacturer and distribute these from their warehouses to retailers.13 The wholesaler’s
value-adding strategy is to include activities that increase sales to customers. The
wholesale sector in South Africa is often known as the invisible industry because the
final consumer does not usually purchase directly from the wholesaler and, therefore,
the consumer has little contact with it. They did, however, play an important role in the
development of the South African distribution channel structure.
Wholesale value-adding activities

South African wholesalers provide customised products to meet complex value chain
needs and ensure the availability and continuity of products. They perform many value-
adding as well as non-value-adding activities, directly and indirectly for the benefit
of consumers.
Table 3.2 Wholesaling activities

Warehousing activities Warehousing services Transportation services
(non-value-adding) (value-adding) (non-value-adding)
Buying and assembling Order-to-cash Transportation
Grading and packing VAT handling Loading and unloading
Cold chain monitoring Waste management Inventory
Storage Inspection Supplying credit to
Packaging (value added) Insurance retailers
Returns management
Risk-bearing
Wholesaling activities Information services Logistics activities

(value-adding) (value-adding) (non-value-adding)
Kitting (kit assembling) Documenting Steering volume and
(Re)labelling information assortment
(Re)packaging Developing databases Developing logistics
Market access services innovations
Rework
Marketing services
Marketing information
South African retailers

South African retailers are distribution value chain members selling goods and services
to the consumer.14 Formal retailers constitute traditional shops and stores that operate
from buildings and according to governmental laws and regulations regarding the
operation of shops and employment. They are medium or large companies that operate
from an established location where they are permanently based. Formal retailers such as

Massmart Holdings in South Africa include department stores, speciality stores, chain
stores, general dealers, convenience stores, supermarkets and hypermarkets.15
Retailers use product brands to increase customer demand and, because of their
direct contact with consumers, obtain market knowledge and information for
manufacturers. The South African retailers in the formal sector own a relatively small
share of the total retail industry and are operated independently of other enterprises.
There are about 53 644 retailers in the South African formal sector, with retail trade
sales of US$1.28 billion.16 Although South Africa has a relatively small retail market
compared to the rest of the world, retailers definitely form a stable market and are the
cornerstone of the continued existence of the wholesaler. Initially this type of retailer
traded in the coastal towns, but it was only in the densely populated Witwatersrand area,
where it increased in both size and power, that it became independent of the wholesaler
in certain areas. The upshot was that the formal retailer became a strong competitive
factor in the distribution channel structure.
In South Africa, the four main groups of large retailers, namely Shoprite group, Spar,
Pick n Pay and Woolworths, sell 63 % of all food products in retail.17 These retailers are
large organisations that purchase directly from manufacturers, and they are therefore in
direct competition with wholesalers. Increased growth in the retail sector exacerbates
this competitive situation. The definition of a wholesaler is an enterprise that obtains
50 % of its gross sales from wholesale sales. It is clear that retailers also market to
consumers. Their target markets thus overlap and they are involved in a competitive
struggle.
The growth of the large independent retailer was the cornerstone of the retail
revolution in South Africa. There was unprecedented growth in the retail sector during
the 1960s, which surprised manufacturers and the larger retailers (currently the large
retailers) and caught the smaller retailers on the back foot. The smaller formal retailers
had difficulty adjusting to the rapid and radical changes in the distribution channel
structure. It is this group of retailers that currently constitute the target market of the
cash-and-carry wholesaler. During the period 1971–2018, the number of formal retailers
rose by an average of 4.9 % per annum, which consequently increased the marketing
potential of the wholesaler substantially.18 Retailers in the formal retail community are
important channel participants in the South African distribution channel structure.
Formal retailers contribute on average 29 % to South Africa’s gross national product and
form a vital target market of wholesaler.19
Large retailers’ value-adding activities

Economic trends such as unemployment and limited job opportunities in the formal
sector generate increasingly more retailers. Table 3.3 shows activities that the large
retailer performs in South Africa.

Number of potential customers

Producers/manufacturers that have limited potential may use their own sales force
to sell directly to ultimate consumers. For example, Nike has a very big market and
therefore makes use of a number of different intermediaries to market its products.
Geographic concentration of the market

When most of the customers are located in the same geographic area, direct sales are a
very practical way of distribution.
Order size
Direct distribution is economical when the organisation is large: a large food

manufacturer will sell directly to grocery stores, for example Koo or All Gold.
Product considerations
The product is the second point to consider when developing a distribution channel, the
most important aspects of which are listed below.38
Unit value
The price that is attached to each product unit has an influence on the amount of funds
available for distribution.
Perishability
Some products have a very short shelf life, such as milk and fresh flowers, and therefore
need to be sold through short distribution channels.
Technical nature of the product

Business products that are highly technical are usually distributed directly. The
producer’s/manufacturer’s sales force must provide significant pre- and post-sale
service. However, a number of electronic companies such as Sony, LG, Samsung and
others have developed products that can be sold through mass retailers. The reason for
this is to limit the workload of after-sales service for the sales force as store personnel
can handle customer queries.
Considerations regarding intermediaries

It is important to consider intermediaries in terms of the factors outlined below.39
Service provided by the intermediaries

It is important that producers/manufacturers choose intermediaries that offer specific
marketing services which they themselves either cannot provide or cannot economically
perform. For example, if a firm in Germany wants to enter the South African market, it
would use industrial distributors as they provide capabilities such as market coverage,
sale contracts and storage of inventory.

4: Understanding channel design and the selection of channel members 81
Availability of desired intermediaries

The intermediaries that are preferred by the producer/manufacturer may not be
available. They may be involved in competing products and therefore not want to add
another line. For example, if Pick n Pay is already selling the Apple iPad, it may not be
prepared to sell the Samsung Galaxy as well, due to the high competition between the
two brands.
Attitude of intermediaries towards producer’s policies

Intermediaries may be unwilling to join a channel if they perceive the policies of a
manufacturer to be unacceptable. In such a case there would be fewer channel options
available to the manufacturer.
Company considerations
It is critical for organisations to consider their own situation by doing a SWOT analysis
of their resources before selecting a distribution channel for their products.40
Desire for channel control

Some producers/manufacturers establish direct channels due to the fact that they want
to control the distribution of their products, even though a direct channel may be more
expensive than an indirect one. By controlling the channel, producers/manufacturers
can achieve more aggressive promotion and full use of the marketing mix.
Services provided by seller

Some producers/manufacturers can make decisions about their channels based on the
distribution function that is desired by the intermediaries. For example, producers/
manufacturers with large advertising budgets such as Pepsi or Coca-Cola will make use
of indirect distribution channels, because retailers who are satisfied with the services of
such producers/manufacturers will be eager and ready to stock their products.
Ability of management
The marketing experience and managerial capabilities of a producer/manufacturer will
influence the decisions about the type of channel to use. Many organisations that lack
marketing know-how will turn the distribution job over to intermediaries.
Financial resources
Any organisation with sufficient financial resources can establish its own sales
force, award credit to its customers, or warehouse its own products, while a financially
weak firm uses intermediaries for the same purposes. For example, Pick n Pay has
established its own ‘No Name’ brand and is performing all the distribution activities for
these products.

Selecting an option
After a company has taken the above aspects into consideration, it will be able to select
the best possible distribution channels for its products so that they will reach the end
users in the shortest possible time. Management should keep in mind that the best
distribution channel should be the one that provides the best performance at the lowest
possible cost. There are four additional steps that organisations can follow to ensure that
they select the best possible distribution channel.41 These are as follows:
Step 1 – Identify the most important decision factors by developing objectives.
Step 2 – Assign a weight of importance (in percentage) to each identified factor.
Step 3 – Rank each channel alternative against the decision factors on a scale of
1 to 10.
Step 4 – Multiply the factor weights with the factor score and add up the totals.
Let us imagine that Company A must make a decision between two distribution channel
designs. The first option is to make use of a national retailer to sell to the end customer,
and the second option is to make use of a wholesaler and a number of retailers. The
management of Company A has decided on the following important factors and weights
that will influence the distribution decision:
Effectiveness in reaching the target market (30 %)
Amount of net profit if the channel operates effectively (40 %)
Amount of capital needed by the company (20 %)
Amount of channel control that Company A wants (10 %)
The weight allocation implies that the main considerations of the manufacturer are profit
and reaching the target market. The amount of capital needed is not that important, and
channel control is of less importance. Table 4.2 is an illustration of the above situation.
From Table 4.2 it can be seen that using a national retailer scores lower than the
option where a two-level distribution structure is used. The factor score for net profit is
higher for the two-level option due to the fact that Company A has much more control
over the channel, which could ultimately result in attaining a higher net profit.

Table 4.2 Matrix for selecting intermediaries

Applied to select a national retailer (one-level distribution structure)
Factor Factor Factor score (B) Rating (A × B)
weight
0 1 2 3 4 5 6 7 8 9 10
Target 30 % X (30 × 6) = 180

customer
Net profit 40 % X (40 × 5) = 200
Capital 20 % X (20 × 5) = 100

needed
Channel 10 % X (10 × 2) = 20
control
Total 100 % 500
Applied to select a two-level distribution structure (wholesalers and retailers)

Factor Factor Factor score (B) Rating (A × B)
weight
0 1 2 3 4 5 6 7 8 9 10
Target 30 % X (30 × 6) = 180

customer
Net profit 40 % X (40 × 6) = 240
Capital 20 % X (20 × 5) = 100

needed
Channel 10 % X (10 × 9) = 90
control
Total 100 % 610
Source: Adapted from Strydom et al, 2005
Reasons for channel modification

Owing to the fact that the market changes constantly, it becomes necessary to modify
the relationship with intermediaries.42 There are three specific types of channel
modification, and they are associated with the product life cycle, customer-driven
refinement and the need for multi-channel systems. The most difficult changes are those
whose implementation requires a total modification of the overall channel strategies.43

An important thing to do in channel management is to ask questions concerning

the ability of current structures within a specific industry to satisfy customers in
terms of their needs with regard to service outputs. Doing this analysis may uncover
the potential for innovation which might otherwise have remained undetected.
Continuously analysing and controlling might help organisations to notice warning
signs that distribution channels need to be re-evaluated and properly modified before
insoluble problems surface that might upset the balance of power or reduce channel
cooperation. The following indicators will inform organisations when channel redesign
may be necessary:44
Changes in the buying patterns of customers
Product movement through its life cycle
Environmental change
Economic changes such as rapid inflation
Any changes in the industry, and competitive conditions such as mergers,
acquisitions and buyouts.
There are a number of situations that can point out that it is necessary for an organisation
to redesign its channels. These types of situations can be the development of a new
product or a whole product line, a decision to target current products or product
lines to new customer or business markets or geographic areas, or the awareness that
important changes have been or are about to be made to other aspects of the organisation’s
marketing mix. Furthermore, these situations can occur when current channel
members change their policies, when they consistently fail to perform as expected, or
when they are engaged in practices that cause conflict. When a new firm is developed,
either from scratch or as a result of a merger or acquisition, it is vital to establish new
channel arrangements.45
SUMMARY
It is critical that the best possible channels are designed to create real and authentic value for
their end users and distributors. Channel design refers to decisions associated with developing
new marketing channels where none had existed before, or to modifying existing ones.
Distribution channels are basically composed of marketing intermediaries, the people
and firms that operate between the producers/manufacturers and the customer or industrial
user. Marketing intermediaries include wholesalers, retailers, distributors, brokers, agents,
rack jobbers, etc. To have a successful distribution channel, partners should be selected
carefully. Some factors that are considered are: financial strength; sales strength; product lines;
reputation of the intermediary; market coverage; sales performance; managing strength; etc.
For organisations to select the best distribution channels for their products, they need
to take aspects in terms of the market, the product, middlemen and the company itself
into consideration. As the market changes constantly, it becomes necessary to modify the
relationship with intermediaries.

Review questions
1. Discuss what is meant by the term ‘distribution channel’.
2. Explain the steps involved in creating a distribution channel.
3. Distinguish between the different types of distribution channels.
4. Describe the difference between consumer and industrial distribution
channels.
5. Distinguish between the different techniques that can be used to create or
design a distribution channel.
6. Distinguish and discuss the different intermediaries.
7. Explain why channel modification may be necessary.
CASE STUDY
Amarula Cream – The Spirit of Africa
AMARULA CREAM, ACCORDED SUPERBRAND STATUS in 2008 and 2009 by the South African
Superbrands Council, remains one of the country’s most popular and best-loved brands. Despite
the advent of several other local cream products inspired by Amarula’s exotic and alluring
mystique, it is still by far the country’s favourite of its kind.
Amarula Cream is one of South Africa’s most successful exports. It not only dominates the
domestic market, but it has been a resounding success in a number of international markets,
thanks to its very exotic but accessible taste and positioning. While many high-profile international
brands have been adversely affected by the protracted recession that took hold virtually all
over the world in 2008, Amarula has been steadily building its total sales volumes year on year.
South Africa remains its single biggest market, and domestic sales continue to climb, despite the
advent of competition from imitation brands. The domestic market also provides an important
platform to access foreign tourists, exposing them to a tangible taste of southern Africa’s
indigenous attractions.
Source: Pellegrini & Reddy, 1989
Questions
1. Amarula Cream is a brand that is known worldwide. Which type of distribution intensity does
Amarula Cream make use of? Discuss and apply to Amarula Cream.
2. As marketing manager of Amarula Cream, you were asked to design an effective distribution
channel for Amarula Cream. Discuss the type of distribution channel that you would create for
it as well as the type of intermediaries involved.
3. If the revenue of Amarula Cream stops increasing, what can be done to solve the problem?

References
1 olnicki, K. 1998. Managing Channels of Distribution: The Marketing Executive’s Complete
R
Guide. USA: AMACOM.
2 Strydom, JW, Grové, T, Van Heerden, CH, Nel, D, Van Scheers, L & Bothma, C. 2005.
Distribution Management, 2nd ed. South Africa: New Africa Education.
3–4 Rosenbloom, B. 2013. Marketing Channels: A Management View, 8th ed. USA: South-
Western Cengage Learning.
5 Vashisht, K. 2005. A Practical Approach to Marketing Management. India: Atlantic
Publishing and Distributors.
6 Harvard Business School. 1994. Designing Channels of Distribution. Boston: Harvard
Business School Publishing.
7 Strydom, op cit.
8 Kapoor, SK & Kansal, P. 2003. Basics of Distribution Management: A Logistical Approach.
India: Prentice Hall.
9 Harvard Business School, op cit.
10 Vashisht, op cit.
11–12 Mohr, J, Senqupta, S & Slater, S. 2010. Marketing of High-technology Products and
Innovations, 3rd ed. Upper Saddle River: Pearson Education.
13–14 Strydom, op cit.
16 Cant, MC. 2010. Marketing: An Introduction. Cape Town: Juta.
17 Kapoor, op cit.
18 Cant, op cit.
20–22 Young, FC & Pagoso, CM. 2008. Principles of Marketing. Quezon: REX Book Store.
23 Rolnicki, op cit.
24 Majumdar, R. 2006. Product Management in India, 2nd ed. India: Prentice Hall.
25 Cant, MC, Van Heerden, CH & Ngambi, HC. 2010. Marketing Management. Cape Town:
Juta.
26 Kapoor, op cit.
27 Wise Geek. 2012. What is a rack jobber? http://www.wisegeek.com/what-is-a-rack-jobber.
htm (Accessed: 12 August 2018).
28 Kapoor, op cit.
29 Czinkota, MR & Ronkainen, IA. 2007. International Marketing, 8th ed. USA: Thomson
South-Western.
31–33 Cant, Van Heerden & Ngambi, op cit.
34 Harvard Business School, op cit.

35 Waksman, K. 2012. Choose the right distribution channel. http://wholesalers.about.

com/od/SellingYourProducts101/a/Choose-The-Right-Distribution-Channel.htm
(Accessed: 12 August 2018).
36 Blurt it. Not dated. Which are the factors affecting the selection of distribution channel?
http://www.blurtit.com/q5373751.html (Accessed: 12 August 2018); Kapoor, op cit.
37 Blurt it, op cit.
38 Kapoor, op cit; Blurt it, op cit.
39 Singh, S. 2012. What are the factors that influence the choice of channel distribution?
http://www.preservearticles.com/2012022923848/what-are-the-factors-that-influence-the-
choice-of-channel-of-distribution.html (Accessed: 12 August 2018).
40 Blurt it, op cit; Singh, op cit.
41 Strydom, op cit.
42 Czinkota, MR & Ronkainen, IA. 2011. Global Business: Positioning Ventures Ahead. New
York: Routledge.
43–44 Cant, Van Heerden & Ngambi, op cit.
45 Pellegrini, L & Reddy, SK. 1989. Retail and Marketing Channels: Economic and Marketing
Perspective on Producer–Distributor Relationships. England: Routledge.

5: Functions of the marketing
value chain 5
LEARNING OUTCOMES

yy Explain the different functions of the marketing value chain
yy Explain the concepts of purchasing, inbound transportation, quality control, demand
and supply planning, receiving, materials handling and storage, inventory control,
order processing, shipping, warehousing, distribution, transportation, and customer
service
yy Provide an overview of how the functions of the value chain are used in different
organisations.
Introduction
Due to increasing globalisation and the fierce competition between suppliers, it is
imperative that organisations put in place an efficient value chain that will assist in
improving the supply chain between producers and end users. It is important to
indicate the difference between a value chain and a supply chain as these concepts
are intertwined. This chapter explores the different functions of a value chain that
organisations currently use.
A value chain is a model used by organisations to map the production activities
into manageable activities that are particular to producing certain goods in a company.
The main aim of the value chain is to assist companies in maximising profits. The
following functions of a value chain will be discussed in detail in the rest of this
chapter: purchasing, inbound logistics, production and quality control, demand and
supply planning, inventory management, order processing, distribution, warehousing,
transportation, and customer service.
Functions of a value chain

A value chain involves interconnected undertakings that organisations make to create,
achieve and sustain competitive advantage in the marketplace.1

5: Functions of the marketing value chain 89
The concept of a value chain was formulated by Michael Porter as the ability of
companies to offer consumers value for the goods and services at a lower cost than the
production process. Many organisations certainly depend on the functions of the value
chain to assist in the smooth running of the everyday activities of the business, and to
also ensure that the goals and objectives of the business are reached. A value chain can
be described as the activities that organisations undertake not only in the production
process but also to ensure that the produced goods/services are delivered to the end
consumer at a price they are willing to pay.2
Therefore, the concept of the value chain sees organisations producing goods or
rendering services as systems comprising subsystems which focus on the production
processes between inputs and outputs. Inputs and outputs include the processes
between the production and consumption of resources, such as cash, labour, materials,
equipment, buildings, land, administration, and management. Marketing, as one
of the major functions of the business, plays a vital role in the value chain. T h ere are
different primary and support activities of a value chain. The primary activities include
inbound and outbound logistics, operations, marketing and sales, and service; whereas
the support activities are procurement/purchasing, human resource management,
technological development, and infrastructure.
Activities essential in the production process and in ensuring that the final product
is delivered to the end user are considered part of value chain logistics. Marketing is
an essential component in the value chain process, and comprises all strategies used
to convince potential customers to purchase a product, such as channel selection,
advertising, and pricing. Marketing also includes service as one of the essential
components of the value chain, and it includes all activities that create better consumer
experiences, such as customer service and repair services.
Marketing includes everything organisations do to ensure that the produced goods
and services reach end consumers, and that the perceived value of the goods offered
to consumers is aligned with the amount of money they are willing to pay for those
particular goods/services. Such efforts include advertising, personal selling, sales
promotion, publicity, sponsorships, public relations, direct marketing, etc. It is thus
essential to understand how marketing is related to the value chain, as both efforts assist
companies with the production process as well as delivering value to the end consumer
with the aim of increasing revenues and profitability.
Different organisations operate differently, including in how they carry out value
chain activities, and how value chain activities are carried out determines organisational
costs and profits. The next section discusses purchasing and how the purchasing
department operates in an organisation.
Purchasing
In order to be able to understand the role of purchasing in the value chain, it is
crucial to know the meaning of purchasing, the different activities of purchasing, and
how purchasing is connected to the other functions of an organisation. In a nutshell,

purchasing refers to the process of buying and acquiring goods and services for the
purpose of consumption or reselling.
Purchasing can be done in an individual or organisational capacity, and it needs
to involve two parties that are willing and able to exchange the goods/services for
money, and money for goods/services. Purchasing is often used interchangeably with
procurement, and in this sense is defined as a process that ‘involves working with
engineers, operations and quality people and suppliers to help an organisation obtain
the necessary supplies, materials, and services’.3
Purchasing is also an important function as it incorporates the processes involved in
buying goods/services that a company needs to operate. The aim of each organisation
is to ensure that the right product is produced at the right cost, sold to the consumer at
the right price that is equivalent to the value of the product, promoted using the right
marketing tools suitable for the business/product and the consumer, and delivered at
the right place at the convenience of the consumer. Purchasing is therefore interrelated
with the 4 Ps of marketing, namely product, price, promotion, and place. Next, it is
important to understand the purchasing department and how it operates.
The purchasing department

The purchase of materials in an organisation is primarily made by the purchasing
department.4 The purchasing department is normally controlled by a general purchasing
agent. The supervisors or departmental heads of most small and medium-sized
businesses purchase materials for production purposes as and when the need arises,
and these smaller businesses often do not have purchasing departments or agents.
Nowadays many organisations, especially larger ones, have purchasing departments
to handle all purchasing requirements. Purchasing departments are responsible for the
following tasks:5
Proposal analysis
Supplier selection
Issuing purchase orders
Coordinating purchase needs with user departments
Identifying potential suppliers
Conducting market studies for material purchases
Meeting with sales representatives
Negotiating and relationship-building
Contract administration
Resolving purchasing-related problems
Maintenance of purchasing records.
Traditionally, the purchasing department obtains production supplies, materials,

machinery, and equipment that will be used by an organisation to produce certain
products demanded by the target consumers. Additionally, the purchasing department

needs to be knowledgeable about sources of supply, prices, and shipping and delivery
schedules. It is also crucial that the purchasing department prepare and place purchase
orders, as well as making systematic reports (or arranging for them to be made) between
the accounting, receiving, and purchasing departments. The purchasing department
also needs to verify and approve payments pertaining to invoices that correspond
with purchase orders placed. This process will enable organisations to centralise the
verification and approval of invoices in the department, eliminate duplicating payments,
and have sufficient and correct information regarding quantities ordered, prices, terms,
shipping instructions, and all other particulars of purchases.
Apart from the activities of the purchasing department listed above, the following
may be regarded as the objectives of the purchasing department and of value chain
management personnel:
Keeping up with market trends
Training, developing and motivating professionally competent personnel
Avoiding duplication, waste, and obsolescence
Analysing and reporting on long-range availability and costs of major purchased
items
Continually searching for new and alternative ideas, products, and materials to
improve efficiency and profitability
Administering the purchasing and supply management function proactively,
ethically, and efficiently
Supporting the business’s operations with an uninterrupted flow of materials and
services
Buying competitively and wisely (achieving the best combination of price, quality
and service)
Minimising inventory investment and loss
Developing reliable and effective supply sources
Developing and maintaining healthy relations with active suppliers and the supplier
community
Achieving and maintaining maximum integration and effective working
relationships with other departments
Taking advantage of standardisation and simplification.
The purchasing department or function is involved with total quality management

(TQM), with the aim of ensuring that the organisation has sound quality assurance
measures. (TQM will be discussed in detail below.) Achieving a required level of quality
control will enable an organisation to improve the logistics and customer service
channels. Most organisations opt for an electronic purchasing/procurement system
nowadays, whereby the entire purchasing process – from placing orders until the
payment of invoices – is controlled electronically.

The next section briefly outlines how purchasing is related to other functions/operations
of the organisation.
Purchasing and other functions

As explained above, the main purpose of the purchasing department is to obtain the
materials that will be used in the production process on behalf of the organisation.
The purchasing department processes the requisition of the materials required by
the organisation, contacts suppliers to negotiate contracts, inspects materials to check
they meet specifications, and validates whether the materials meet the specified
standards. This process necessitates a relationship between the purchasing department
and other departments of the organisation that work together to assist the company in
achieving its goals and objectives. In many organisations, several departments labelled
‘functions of a business’ have sub-departments and offer each other support to achieve
what is required.
The relationships between the purchasing and other functions of an organisation are
explained below:
Human resources – The purchasing department must communicate with the HR
department in matters connected with their professional expertise, performance
evaluations, rewards, etc. This is to ensure that the people who are responsible for
spending about 80 % of organisations’ money in terms of material purchases have
the required knowledge and experience to carry out the task.
Finance – The finance department takes the responsibility for processing and
settling bills as directed by the purchasing department.
Production – The production department is responsible for the production of goods
within the business. Production does not exist in a vacuum; it must interact with the
purchasing department for the materials needed. Purchasing must ensure that they
liaise with production in terms of material specification requirements and quality.
Marketing – The role of marketing in stock control cannot be overstated. Marketing
management are responsible for finding out what consumers want in terms of
varieties, functionalities and quality. They transmit this information to production,
who informs purchasing of the materials required. Marketing must ensure that the
final product is sold at a profit so that the company will continue to be in business.
Inbound logistics
Inbound logistics simply means the transport, storage and delivery of products entering
a company. Outbound logistics refers to the process of products exiting the business.
Consumer demands on different organisations operating in highly competitive
and performance-driven markets are increasing the need for accurate delivery and
shipment reliability. This is achieved through reliable and constant internal/external
communications across the supply chain, as well as efficient shipment and transportation.
Inbound logistics is a challenging aspect of any business because shipments rely on trading

partners, carriers, and suppliers. Movement of material includes the outbound process
of sending materials to customers, the corresponding inbound process of receiving
materials from vendors, and organising and monitoring the transportation of material.
Transportation has become the largest expense in logistical activities in both large
and small companies. Efforts to manage transportation activities in a company normally
result in important top- and bottom-line financial improvements. While some may focus
primarily on outbound transportation, it is crucial also to give attention to managing
inbound transportation in the organisation. The amount of inbound transportation is
increasing quickly, and companies are doing everything possible to limit the associated
costs.
For companies to be able to save on inbound transportation costs, it is essential to
strategise and have a planned transportation system such as road transport and water
transport that works to the advantage of the company.
The pressure to improve transportation may be based on the following factors:

Increasing cost and service impact of transportation on overall supply chain
Increased supply chain volatility (shifts in lead times, inventory or volume)
Increased customer demands (improved cycle times or delivery performance)
Expanded complexities (ie number of countries, transport modes, or volumes).
Although there may be pressures in an organisation pertaining to the inbound

transportation costs in the production process, it is crucial that the organisation ensure
that efficient systems are put into place to manage the inbound transportation systems
of the organisation.
The key actions for improving transportation management are as follows:

Rationalise the number of trading partners (suppliers, carriers, and brokers)
Renegotiate cost/service contracts with suppliers and other trading partners
Fully integrate transportation management within the organisation as well as externally
Develop event management capability to reroute and rebalance while in transit.
The following are the guidelines considered to create an effective inbound transportation
system:
Create a mechanism for exceptions handling that fits within the current business
processes
Organise current and future shipments by origin and destination
Identify and chart the price/service capabilities and limitations of each transportation
vendor, consistent with the desired level of service and cost
Identify shipment volume and weight, frequency, modal requirements, special
needs, and time in transit

Identify consolidation opportunities and weight breaks that support the price and
performance needs of the company
Create rules and distribute the guide
Create communications procedures for the guide
Plan to repeat this process in four months, or consider simplifying the process by
taking it online.
Production and quality control

Quality refers to the capacity of the goods and services of a company to satisfy a particular
need. Production control includes the measures put in place by the organisation to
ensure that the production processes of the business adhere to set standards of quality.
The quality of a product or service is measured against specified criteria designed by
the company to ensure that the desired quality assurance is achieved. Often, consumers
associate quality with the value of the product, and thus consumers are only willing to
pay a certain amount of money for a product/service that is believed to be of a certain
perceived value. Thus, companies put extra effort into putting measures in place to
ensure that the production process follows particular quality standards to produce
goods and services of a certain quality.
It is important to differentiate between quality, quality performance, quality
control and management, as these concepts are intertwined and used interchangeably,
but should not be.6 Quality performance refers to a process of guaranteeing that
products or services meet the specified high standards of the organisation consistently.
Quality control, on the other hand, comprises the process of controlling the
organisation’s materials, human resources, equipment and machinery that are used in
the production process.
Advantages of quality control include the following:7

Dealers and consumers are assured that goods meet the required standard.
It encourages workers to continue producing quality goods.
Production costs can be reduced through the elimination of poor-quality goods.
It leads to improved quality and product design.
Manufacturers provide salary and wage incentives for quality work.
It reveals poor performance by workers and faulty machines – this is important for
training workers and replacing machinery.
It improves the quality, reliability, and safety of a product/process.
It improves the company’s image and competitiveness.
It increases user satisfaction.
Quality management and supply chain management hold shared responsibility, as both
are responsible for coordinating the quality efforts and ensuring that the produced

goods meet the requirements of production. It is crucial to manage the production

process from the manufacturer to the end user, but also ensure that the produced
goods conform to the set quality standards. This effort necessitates quality management
in an organisation, as it ensures that consumers receive value in exchange for money.
Undoubtedly, there is no individual that is willing to pay money for a commodity
or service that is of no quality, unless it is sold very cheaply and they have very little
money. Organisations need to ensure that the goods sold to consumers have good
quality and that the quality is managed thoroughly within the production process and
the supply chain.
Quality control in the different functions of a business

The top management of a company needs to manage the different business functions in
a manner that will provide maximum benefit to all parties concerned. These functions
are interdependent and must be managed continuously. The quality of performance
of these functions is important for staying competitive, and must be monitored and
evaluated. Therefore, control systems must be in place for each function. The different
responsibilities of the different functions of a business, and how they relate to quality
control in the value chain process, are indicated below.
General management
General management facilitates the overall responsibilities of the other functions: the
planning, organising, controlling, and leading of all activities of the business. General
management ensures that all systems are put into place to allow the business to run
smoothly, increase revenues, and maximise profits. This function is related to quality
control by ensuring that the quality standards set by the business are achieved and
adhered to by all the other functions of the business.
In an attempt to ensure quality control, the general management function creates
a suitable mission and vision for the business enterprise, sets realistic aims for the
business, communicates the vision and mission of the business with the employees
through the workplace forum, meetings, etc, organises employees in the most efficient
way, demonstrates effective leadership and control over the execution of all the business
functions, communicates with employees, involves employees in decision-making
processes, develops and implements or controls the execution of strategic planning, and
improves of the profitability of the business through effective planning and execution.
Purchasing function
Purchasing refers to all the activities in the company that deal with acquiring the raw
materials that are needed for the production process to assist the business to achieve
the set goals and objectives. The purchasing function is an important component of
quality control, as it includes all the processes involved in the production process, from
the conception stage to the end user. The quality control of the purchasing function
ensures that the business purchases raw materials from the right supplier, at the right
price, the right time, in the right quantities, and at the right place. The correct quality

control under the purchasing function will enable the organisation to make wise
purchases that will increase the profitability of the business. Without proper quality
controls in place, imprudent purchases may result in extra storage place being needed,
at extra costs, and unsold stock being stored for extended periods. Stock control in the
purchasing department must be done regularly to minimise losses pertaining to theft
and obsolescence, and to also ensure that the business always has adequate stock to
meet the demand of the target market.
Production function
The production function relates to the balance created between the physical inputs
versus the physical outputs of the business. Mathematically, a business needs to
ensure that it uses minimal inputs to produce maximum outputs – this is how a
business makes a profit. It is also crucial that the production function has the correct
quality control measures in place to ensure that the produced goods meet the expected
quality standards of the business. This includes choosing the most suitable production
system, doing accurate production cost calculation, which will help to ensure that the
business remains competitive as costs are contained, and putting cost control systems
in place to keep costs within reasonable margins. Adhering to safety procedures and
regulations will contribute to the safety of all factory workers. Products must satisfy the
requirements of consumers regarding safety, reliability, durability, after-sales service,
and warranties – this means that the production department needs to perform quality
control on the items produced to determine tolerance levels and also to inspect products
produced regularly.
Marketing function
In an organisation, the marketing function plays an important role by assisting the
company to identify potential products, and also ensuring that systems are put in
place to promote the products to the target market. The promotional activities carried
out by the marketing function need to adhere to the set standards of quality control
designed by the business, and this will ensure that the business differentiates itself
from its competitors. Controlling quality in the marketing department and function
will enable the business to check whether it is doing effective market research and
product development. This also includes making use of ethical advertising practices,
having a good marketing communications mix, using a suitable advertising campaign
to make customers aware of available products, and thus increasing the market share
of the business. It is also important that the business makes the goods available within
easy reach of consumers through storage and the correct location of the business. The
marketing function also assists organisations in gathering feedback from consumers to
adapt the marketing policy instruments, coordinating distribution with production and
advertising strategies, good pricing strategy, and designing effective packaging.

Finance and administration function

Finance and administration involves the different activities operating with shared
services, such as budgeting, finance, procurement, contract administration, and
information technology hardware support. It is important that departments operating
under finance and administration put measures in place to promote adequate quality
controls to assist the business to maximise revenues and profits. This includes obtaining
capital from the most suitable sources, determining the profitability, gearing and
liquidity of the business on a regular basis, as well as compiling accounting statements
and investing surplus funds effectively. On the other hand, the administration function
needs to ensure efficient capturing and processing of data and information, make
information available to management so that management can make correct decisions,
apply technology efficiently, and handle complaints in an effective and speedy manner.
The impact of quality control on small and large business structures

The size of a business refers to the type and size of a business based on the revenue levels
attained by the business, its profitability, employment rate, and other circumstances that
qualify a business to be classified as either ‘small’ or ‘large’.
Small business structures

Examples of a small business structure include a sole trader, a partnership, a trust,
or even a cooperative. Quality control in small business structures is essential as it is
considered a guiding principle to what consumers prefer.
In most cases, smaller businesses rely on consumers to give feedback pertaining to the
level of quality received from the products/services that they purchased. It is therefore
crucial for businesses to ensure that the right quality controls are put in place to ensure
that the consumers of smaller businesses receive quality for the products that is aligned
to their expectations. For good quality control procedures, smaller businesses should be
more conscious about quality goods and services, as the owner supervises all processes
and is aware that faulty products and mistakes can be costly to the business. In smaller
businesses, it is easier to control the human resources procedures and the production
process as there are fewer employees. Small business managers need to ensure that quality
control remains a high priority for the business, as it may make or break the business.
Large business structures

Quality control in larger business structures is extremely important as it is also linked
to the reputation of the business in the market. Large businesses need to ensure that the
correct quality controls are put in place to ensure that the produced products meet the
set standards of the business, and to determine the best activities of the business that
will assist in achieving organisational goals.
Quality control is crucial for larger businesses as it comprises a lot of factors such
as profitability, revenues, costs, equipment, failed systems, operations, supply chain,
marketing, and sales, to mention only a few. When quality control is compromised,
larger business structures can become ineffective, and employees can become less

motivated, which will consequently impact negatively on quality. Larger businesses

produce on a large scale, and therefore quality control becomes more challenging than
in smaller businesses. It is impossible to check the quality of all goods. Large businesses
also need to establish reliable and efficient assessment systems to decrease the risk of
poor quality derived from the production of goods.
Total quality management

Total quality management (TQM) is the organisation-wide management of quality.
Management consists of planning, organising, directing, control, and assurance. Total
quality is called ‘total’ because it refers to both the quality of return to satisfy the
needs of the shareholders, and the quality of products. As defined by the International
Organization for Standardization (ISO): ‘TQM is a management approach for an
organization, centered on quality, based on the participation of all its members and
aiming at long-term success through customer satisfaction, and benefits to all members
of the organization and to society’.8 One major aim is to reduce variation from every
process so that greater consistency of effort is obtained.
A ‘Total Quality Organisation’ generally benefits from having an effective quality
management system (QMS). A QMS is typically defined as ‘[a] set of coordinated
activities to direct and control an organization in order to continually improve the
effectiveness and efficiency of its performance’. Customer expectations inevitably drive
and define ‘performance’ criteria and standards. QMSs focus on customer expectations
and ongoing review and improvement. TQM requires that the company maintain this
quality standard in all aspects of its business. This requires ensuring that things are done
right the first time and that defects and waste are eliminated from operations.
Demand and supply planning

Demand planning is a process regularly used by organisations to aid them in creating
reliable forecasts for their business.9 Forecasting for businesses includes all the
organisational resources used in the production process, such as the assets/equipment,
available stock/inventory, and human resources. Demand planning is also used to guide
businesses in improving precision of revenue forecasts based on the available inventory
of the business. This process is crucial as it assists organisations in planning the inventory
against the demand for goods.
Organisations using demand planning study the demand of goods needed by the
market, and they can then ensure that the right quantities of goods are available to
meet the needs/wants of the target market. These forecasts are understood to be reliable,
and they enhance the ability of an organisation to maximise the profits of a particular
channel or product. The primary objective of demand planning is to create a balance
and an alignment between the supply of goods from organisations and the demand for
products by the target market. By achieving this primary objective, businesses will be in
a better position to achieve profit maximisation.
Demand and supply planning are intertwined, as it is important to ensure that the
supply of goods is planned thoroughly to meet the identified demand. Demand focuses

on the amount of goods that are needed and wanted by the consumers, whereas supply
refers to the organisation’s ability to produce the correct amount of goods that are
demanded by the consumers and to meet the requests of that specific product needed by
the consumers. Businesses need to have systems in place that will ensure that the correct
amount of goods are supplied to the consumers to meet the demand. Since demand and
supply work hand in glove, it is important to create a balance between the two, and to
ensure that the supply of goods in a business always exceeds the demand, but not by too
much.
Demand planning includes: importing historical sales data, creating statistical
forecasts, importing customer forecasts, collaborating with customers, managing
forecasts, building consensus forecasts, securing constrained forecasts, confirmation
with customers, and re-examining data and adjusting planning accordingly. Planning
demand and supply needs to accommodate all types of demand and allow the business
to plan for supply chain processes to ensure availability of stock when needed. In general,
the more about the demand for products is known, the better the forecasts will be.
It is also essential to understand who is responsible for the forecasts, what the forecasts
are about, where the products are in the product life cycle, what the demand pattern
is, and who is providing the additional information required to ensure an appropriate
forecast. For example, a company that regularly forecasts several large product lines
over the limit can cause increased inventories and decreased inventory opportunities.
Inventory management
Inventory management is of the utmost importance throughout the supply chain,
focusing on providing the right quantity at the right time without compromising the
financial position of the business or customer service. Inventory refers to the reserves
of resources held in readiness to produce products and services, as well as the end
products that are kept in stock to satisfy consumers and customers.10 It normally refers
to the four basic kinds of inventory (raw materials, work in process, components, and
finished products), but it is not related to manufacturing. This resource is mostly used
for the benefit of both the business and customers.
It further includes decisions concerning what size inventories should be and
how overstocking of inventory can be weighed against costly stock-outs. The sales
forecast and knowledge of past requirements can be used to help determine the
inventory level that provides proper service at a ‘minimum’ cost. There are three major
costs, which include:
1. Acquisition costs – the expenses incurred in obtaining inventory
2. Holding costs – the expenses incurred to keep inventory in a warehouse or
distribution centre
3. Stock-out costs – the losses that occur when customers demand goods the business
cannot provide.

The best way to manage costs is through the use of the following three control systems:
1. Economic ordering quantity (EOQ) is based on ordering the most economic
quantity. The disadvantage of this control system is that the inventory must be kept,
regardless of the needs of the manufacturing department or customer, for particular
raw materials, components or finished products.
2. Material requirements planning (MRP) was developed to eliminate and minimise
the shortcomings of the EOQ control system. Under this system, an estimate
is made of the demand for raw materials and components necessary to create a
finished product. Inventories are ordered only when they are needed and the costs
of maintaining inventory levels over extended periods of time are thus eliminated.
3. The just-in-time (JIT) system is a refinement of the MRP system. The business
endeavours to manufacture products without incurring significant inventory costs.
However, in contrast to MRP (where the need for raw materials and components is
estimated and they are ordered according to demand), JIT is based on the premise
that actual orders for finished products are converted into orders for raw materials
and components, which arrive just in time for the manufacturing process.
Reasons for holding inventory

Apart from availability problems and the fact that a continuous supply of inventory
cannot be guaranteed, there are several other reasons for an enterprise to hold inventory:
Production and marketing – Sufficient inventory helps ensure that production is
continuous and at an economic level, and it contributes to a lower production cost
per product unit through the efficient use of equipment and labour.
Cost savings and hedging against price hikes – Sufficient inventory creates the chance
for more economic purchases. The supplier business may offer a quantity discount
and/or transport in bulk, which imply cost savings. Forward buying and hedging
against price increases is of particular importance to enterprises operating in
countries like South Africa which are prone to currency volatility.
Protection against supply uncertainties – Sufficient inventory protects the business
against uncertainties of delivery and sudden price hikes by suppliers. It may also
serve as protection against breaks in supply caused by unexpected events, such
as strikes and natural disasters. It can also serve as a hedge during times of high
inflation (which has the effect of increasing real prices).
Purchase costs – It is believed that more inventory will reduce purchasing costs
since fewer orders are made. However, ordering costs are mostly of a fixed nature,
and this advantage would be limited to variable costs.
Buffering in the supply chain – Inventory should be held throughout the supply
chain to act as buffer for the critical interfaces between the following:
–– Supplier–procurement (purchasing)
–– Procurement–production (operations)
–– Production–marketing

–– Marketing–distribution
–– Distribution–intermediary
–– Intermediary–consumer (final customer or end user).
The buffering effect of inventory on the supply chain is closely related to the protection
aspects just mentioned and is referred to as ‘decoupling inventory’.
Order processing
Order processing is regarded as a procedure to fill customer orders after the order has
been received by the business. The process begins when orders are received and ends
when merchandise has been shipped and bills have been sent to customers. Order
processing is also becoming increasingly automated; the avoidance of error in the process
is an important objective for many businesses where expeditious order processing can
be to the advantage of the organisation. If the product is in stock, the order is filled and
arrangements are made to ship it. If the product is not in stock, it triggers a replacement
request that finds its way to the factory floor. Managers should monitor the flow of
goods and of information as the order enters the system. This is done to make sure that
mistakes are corrected before an invoice is made out and the merchandise shipped.
Order processing is becoming more automated through the use of computer
technology called electronic data interchange (EDI). The basic idea behind EDI
is to replace the paper documents that usually accompany business transactions,
such as purchase orders and invoices, with the electronic transmission of the
needed information.
Distribution
Distribution plays a critical role in meeting the needs of a customer. The transfer
of goods takes place along specific distribution channels, which are made up of
intermediaries (retailers and wholesalers) who are mostly and directly involved in the
transfer of products from the manufacturer to the customer. It is the task of marketing
management to link the manufacturer and the various intermediaries in such a way that
the product is made available to the consumer in the right place and at the right time.
Distribution is therefore seen as a key variable of the marketing mix, along with
product strategy, pricing strategy, and promotion strategy. Together, these strategies
ensure an effective and efficient approach that provides the desired goods and services
to customers at the optimum price.
In an environment of external and uncontrollable factors (such as government,
technology, the economy, competition, and socio–cultural buyer and behaviour
patterns) and internal functions (like personnel, financial, production, location, research
and development, and public image), together with the marketing mix, managers must
develop and manage effective and efficient distribution channels. These distribution
channels must be developed and managed with due consideration for various factors
and structures, relationships and communication requirements that impacts on them.

Distribution entails decision-making about the type of distribution channel. It also

entails decisions about the performance of certain activities.
The choice of the distribution channel

There are five distribution channels that can be chosen in respect of a distribution
strategy that entail the choice – or not – of intermediaries:
Channel 1 – This is also known as the direct distribution channel. The intermediary
is eliminated, so the physical distribution activities involved in the transfer of the
product have to be performed by the producer or manufacturer.
Channel 2 – This indirect distribution channel is found in larger retail businesses
that buy directly from manufacturers.
Channel 3 – This indirect distribution channel is often found nowadays. Wholesalers
may sell directly to the final consumer, provided these sales constitute less than 50 %
of their total sales.
Channel 4 – This is the classic indirect distribution channel that is still regarded as
the most effective by a large number of manufacturers.
Channel 5 – In this case, the first intermediary is usually a wholesaler that obtains a
product from numerous producers and sells it to the second wholesaler, which sells
it to the retail trade, which in turn sells it to the consumer.
Warehousing
The holding and housing of goods between the time they are produced and the time they
are shipped to buyer refers to warehousing. Warehousing involves the holding and housing
of goods between the time they are produced and the time they are shipped to the buyer,
and it includes all the activities that take place from when the goods arrive at the warehouse
until they are released for shipment.11 Warehousing involves activities both large and small,
but, taken as a whole, consists of two major activities: storage and bulk-breaking.
It can therefore be seen as the logistical activity responsible for storing products
between the point of origin and the point of consumption. Warehousing provides time
utility, as it stores products during the period they are first produced for or bought by
the organisation until they are required for use by the business. It is important to note
that warehouses are increasingly being used as throughput centres where products are
consolidated, mixed or broken up into smaller lots before being sent elsewhere, rather
than for the typical long-term storage function of the past.
The uses of warehousing

Warehousing can be used for a number activities, including the following:
Inbound consolidation – Products coming from various suppliers can be consolidated
at one central warehouse before they are transported to the business. In so doing,
businesses can reduce the transport costs of incoming products, as fewer inbound
trips have to be made.

Outbound consolidation – This refers to products from various manufacturing

facilities destined for one single customer or the same geographic area being
combined into one shipment (consolidation) in order to save on transport costs.
Bulk-breaking – Warehouses receive large shipments of products from manufacturers
destined for different customers. Once they are in the warehouse, they are broken
up into smaller lots before they are shipped to individual customers.
Mixing – Warehouses receive products in truckloads from various manufacturers,
break them down into smaller quantities and mix them up into different
combinations of products before transporting the mixed products to different
customers.
Postponement – When products need to be packaged, labelled, or assembled
according to a customer’s special needs, these activities can be postponed and
carried out by the warehouse. Thus, as soon as a customer’s order is known, these
activities can be carried out before dispatching the shipment to the customer.
Different types of warehouse

Generally, an organisation can use either public or private warehouses, or a combination
of these two types.
Public warehouse – This is a warehouse owned by a person or a business other than
the business wanting to store its goods. The business wishing to store its goods will
then pay the owner of the warehouse for the space used. The main advantage is that
a public warehouse offers a great deal of flexibility and the business can increase,
reduce or even eliminate the use of space in the warehouse depending on supplier,
customer and seasonal demands. The disadvantage is that the necessary space and
specialised service might not always be available when and where the business
needs them.
Private warehouse – This is operated by the business whose products are stored in it,
but it can either be owned by or leased to the organisation operating it. Businesses
operating their own warehouses find that this offers them more control over the
design and operations of the warehouse as well as over the inventory itself. It further
gives intangible benefits in that customers might experience a feeling of stability
if their supplier has its own warehouse. The disadvantage is that it lacks flexibility
in that the warehouse has a fixed size and cannot be increased or decreased if
demand changes.
Storage consists of holding and housing goods in inventory and is necessary because of
the virtually inevitable discrepancies that occur between cycles of production and cycles
of consumption. Sometimes storage can be part of production rather than distribution
if storage is necessary before the product is bottled and sold, as in the case of wine or
brandy. Bulk-breaking involves converting larger shipments of goods as they arrive at a
warehouse into smaller quantities appropriate for customer needs.

Reasons for storing goods

To have inventories handy to meet buyers’ emergency demands
To age a product
To gain a competitive advantage by being able to point to stocks of merchandise
that competitors don’t have
To ease problems associated with a rush season by having merchandise already
on hand
Irregular production facing regular demand, as with agricultural goods
Regular production facing irregular demand, as with heaters and air conditioners
To postpone the sale of a product until prices are higher
To have products ready to move when a planned promotional campaign begins.
Transportation
Transportation in a supply chain context can include a number of different approaches.
Goods are usually transported from a manufacturer (supplier) to a business and its
warehouse, and then from the warehouse to the production facility and back to the
warehouse, as well as from the business to its customers.
The importance of transport becomes evident when one considers the utility that
it creates. Transport creates place utility by bringing products from where they are
produced or stored to where they are needed. It also creates time utility by ensuring the
fast and consistent transportation of the product from where it is produced or stored to
where it is needed. It thus ensures that products are available when and where they are
needed, and it contributes to the provision of good customer service.
Different types of transport

There are five main groupings of transport models: air, rail, road, water, and pipelines.
Each of these modes has its own unique advantage. The following section will look at
some of them:
Pipelines – They provide a reliable, low-cost form of transport. They are, however,
very limited in the type of product that can be transported. If the product is not in a
liquid, gas, or slurry form, it cannot be transported via a pipeline. The infrastructure
in a country might also cause limitations, therefore this type of transport is limited.
Water transport – Throughout the world, two basic types of water transport can
be distinguished, namely inland waterways and lakes, and sea transport. In South
Africa, however, there are no navigable inland waterways or lakes; water transport
is therefore limited to coastal transport and deep-sea transport. Water transport is
in general a cost-effective form of transport that can transport large quantities of
products over long distances.
Road transport – This is the most flexible of all the modes of transport. Due to the
infrastructural development on all national roads in South Africa, this mode can

provide a door-to-door service. Road transport is cheaper than air transport, but it
is more expensive than water and rail transport. It is regarded as one of the fastest
forms of transport and can compete with air transport over short distances, as air
transport loses time on terminal pick-up and drop-off activities. Normally road
transport can move large quantities of goods over long distances.
Air transport – This is one of the quickest forms of transport. However, it has some
challenges like terminal-to-terminal service, which can increase the transport time
as products still need to be taken to and from an airport as well as be loaded on
to and unloaded from the aeroplane. It is considered the most expensive form of
transport and can carry limited numbers and sizes of products.
Rail transport – The advantage of this form of transport is that it is very cheap and
less expensive to use. The negative part is that it is slow, when considering that it
provides terminal-to-terminal or station-to-station service.
Different combinations of these modes of transport can also be used; this is better known
as internode transport. Another important contribution to transportation is the use of
containers. Through the use of containers, the following advantages can be gained:
Handling costs are reduced, as containers rather than individual items are handled
Because the handling of products is reduced, less damage to products occurs
Transport times are reduced because product handling is reduced.
Customer service
For any business to survive, it needs customers. Without excellent customer service,
it will be difficult to have loyalty. Relatively new technology such as the internet has
resulted in customers becoming more aware of their rights and being able to access
information quickly. If customers are not satisfied with a product or service, they can
easily find someone else willing to provide for their needs. Therefore, businesses that do
not provide good customer service will not survive in the long term.
In a broad sense, customer service is anything that a business does for customers
that enhances their experience. Customer service is thus what the business does to add
value to its products and service in the eyes of customers.
Customers have certain expectations from their contact with business, and it is the
responsibility of the business to know what its customers want and to provide them with
excellent customer service. For any business to gain the loyalty of its customers it needs
to live up to their expectations of customer service. If this does not happen, the business
might suffer.
Customer service can be defined as the ability of knowledgeable, capable and
enthusiastic employees to deliver products and services to internal and external
customers in such a way that it satisfies the identified and unidentified needs of
customers and ultimately results in positive word-of-mouth advertising and repeat
business. Employees therefore play an integral part in the total customer experience,
and this has a profound effect on the success of the business.

Customer service is the provision of service to customers before, during, and after a
purchase. In fact, customer service means any service that a business provides to
customers to maintain their loyalty and to secure a sale.
Customer service should form an integral part of a business’s total product offering,
behaviour, and business culture. Customer service does not stop – businesses need
continuously to redesign, tweak, and improve their customer service. These changes
need to keep pace with ever-changing customer needs and expectations.
It is crucial to note that customers are not limited to those outside the business; they
also include internal customers. Both internal and external customers play an important
role and need to be managed correctly and fairly.
The importance of excellent customer service

It very disappointing that in spite of the accepted importance of customer service,
the delivery of excellent customer service is rare. Many businesses nowadays stress
the importance of customer service, but very few know how to provide outstanding
customer service.
Businesses that provide excellent customer service experience a number of potential

rewards, the most beneficial of which are the following:
The work of staff is more personally fulfilling
The business gains a unique competitive advantage
The business keeps their customers by developing solutions to customers’ challenges
The business builds up a positive reputation in the market and earns the respect of
customers and peers
The business accomplishes profit goals more successfully.
Service, as indicated above, is important to customers; therefore it is also important to

the business and its growth. It is not a nice-to-have, but rather an essential element of
the total product offering and customer experience.
Managing customer expectations

Almost all customers have some expectations that must be met when they purchase a
product. This expectation is solely based on customers’ perceptions. If a customer had
a bad experience of a product, they might be reluctant to purchase the product again
or recommend it to others. Instead, they might speak badly about the product to other
potential buyers.
Customers have different levels of expectations. There are two basic levels: primary
and secondary. Primary expectations are customers’ most basic requirements for an
interaction. Secondary expectations are based on previous experiences that serve as
enhancements of primary expectations. These expectations are not static but change
all the time. This might be due to the latest trends in the market, specifically based
on technological improvements and innovation. Nowadays customers have higher

expectations than ever before; therefore marketers have to listen more closely to
customers than ever before.
Knowing and understanding customers’ expectations and perceptions is therefore
crucial to the survival of a business; businesses need to manage this properly and
effectively so that they can prosper. In essence, customer service is all about the
expectation to deliver what you have promised to do for the customer. When it comes
to service specifically, there are five primary dimensions to service that affect customers’
perception of the service they have received. These are the following:
1. Reliability – Customers want service to be performed well and when the company
says it will be performed.
2. Responsiveness – Customers want their needs met with initiative. This also means
that they want their queries answered.
3. Assurance – Customers want service providers to be knowledgeable, courteous and
trustworthy.
4. Empathy – Customers want care, concern, and to be treated as individuals.
5. Tangibles – Customers care about the tangible product or the service and physical
appearance of the facilities and people.
The consequence of bad service

In the prevailing business climate over the world, it is easy to lose a customer and even
easier if bad service is given. When a business neglects its customers’ concerns, treats
them disrespectfully, or fails to deliver on promises, customers will leave that business
for another. When customers leave the business, there are the following consequences:
The business loses the income that the relationship generated. The loss of one
customer may seem insignificant, but the effects can be damaging over time.
The reputation of the business may suffer, as the customer will share their negative
experience with friends and family.
Employees become unhappy due to a bad atmosphere in the business.
Businesses need to be aware that there is a very high cost related to bad service.

SUMMARY
The following functions of a value chain were discussed in detail in the chapter: purchasing,
inbound logistics, production and quality control, demand and supply planning, inventory
management, order processing, distribution, warehousing, transportation, and customer service.
The functions of the marketing value chain can best be described as all the initiatives
aimed at the buying, transportation, warehousing, distribution, and management of products
and services needed by an organisation to satisfy the needs of its customers. When buying a
product or service, the focus should be on having the right quantity and quality, at the right
time, from the right supplier, at the right price. Once a product has been bought by a customer,
it needs to be moved from supplier to the customer, using any one or a combination of the
different modes of transport discussed in this chapter.
Inbound logistics is also important: it is responsible for inventory management, which
is focused on determining the optimal inventory levels, since carrying too much inventory
will increase the business’s carrying cost, while carrying too little inventory will increase the
occurrence of stock-out situations, leading to reduced customer service and the business
being less competitive.
Review questions
1. Explain the task of the purchasing department in an organisation.
2. List the objectives of the purchasing and value chain management personnel
in a business.
3. Discuss the relationship between the purchasing and other functions of an
organisation.
4. Discuss the key actions to improve transport management in an organisation.
5. Discuss the different uses of a warehouse.
6. Explain the difference between public and private warehouses.
7. Explain why businesses store goods in a warehouse.
8. Explain the characteristics of the different modes of transport that you
would need to consider in the selection of the best mode of transport for
your product to reach its target customers.
9. Businesses that provide excellent customer service experience a number of
potential rewards. Explain the most beneficial reward a business can gain
from providing excellent customer service.
10. Explain the consequences of bad service that businesses should be aware of.

References
1 adenhorst-Weiss, JA, Van Biljon, EHB & Ambe, IM. 2017. Supply Chain Management: A
B
Balanced Approach, 2nd ed. Pretoria: Van Schaik.
2 Chopra, S & Meindl, P. 2013. Supply chain management: strategy, planning and operations.
Harlow: Pearson Education.
3 Burt, D, Petcavage, S & Pinkerton, R. 2010. Supply management. Singapore: McGraw-Hill.
4 Badenhorst-Weiss, Van Biljon & Ambe, op cit.
5 Badenhorst-Weiss, Van Biljon & Ambe, op cit; Chopra & Meindl, op cit.
7 Russell, JP. 2012. History of Quality Assurance and Auditing. The ASQ Auditing Handbook
(Russell ed), 4th ed. Milwaukee: American Society for Quality Press: 299–301; Badenhorst-
Weiss, van Biljon & Ambe, op cit.
8 ISO 8402:1994
10 Erasmus, B, Strydom, J & Rudansky-Kloppers, S. 2016. Introduction to Business
Management, 19th ed. Cape Town: Oxford.
11 Erasmus, Strydom & Rudansky-Kloppers, op cit.

6: Managing business relationships
6
LEARNING OUTCOMES

yy Explain the characteristics of value for customers and for organisations by
distinguishing the key differences between them
yy Explain the value equation and how it impacts on the competitiveness and
profitability of organisations
yy Explain why value is regarded as a strategic goal and its relationship with a sustainable
competitive advantage, product differentiation and a unique selling proposition
yy Discuss the drivers of value, explain why they are regarded as key success factors and
how they are managed as a process
yy Define relationship management, by contrasting it with collaborative relationship
management
yy Identify and discuss eight antecedents of relationship management
yy Explain the relationship management spectrum
yy Discuss the three generic business relationship types, with emphasis on collaborative
relationships.
yy Discuss the role customer relationship management plays as a new marketing mix
element
yy Identify and explain five reasons why relationship management fails
yy Discuss why measuring customer profitability is an important exercise in managing
collaboration with individual channel partners
Introduction
The focus of this book is supply chain management. We have shown that effective supply
chains add value to supply chain participants (including final customers) mainly on two
fronts, namely by lowering costs or by increasing product advantages. Added value, or
value creation, are key concepts in supply chain management. To create added value,
each channel member needs to answer two questions: what value – in terms of lowering
cost and/or adding product attributes – could be added for upstream and especially

6: Managing business relationships 111
downstream partners, and how should it be marketed and delivered? Addressing these two
issues – value creation and delivery – falls within the mandate of marketing management,
due to its boundary-spanning role in the organisation. This is the first topic of this chapter.
Researching market dynamics, contributing to product development and delivering
need-satisfying products to customers are key responsibilities of the marketing function.
These contributions are facilitated by, among other things, establishing closer ties with
upstream and downstream channel partners, which includes final consumers at the
end of the supply chain. Establishing and managing business relationships to create
more value for the organisation and for channel partners also relies on an effective
marketing effort: convincing channel members that closer ties would be beneficial
to them. This is the main thrust of this chapter. First, though, the principles of
‘value’ and ‘value management’ will be investigated within the context of business
relationship management.
Value within the supply chain

Value means different things to different people. As final customers we differ in what we
think of as value in a car, a house, a vacation, and a television and sound system. We also
have different perceptions regarding the value that different brands on the market have.
You are a Toyota person, your friend is a Golf person, and your next-door neighbour
believes Mercedes-Benz offers the best quality and prestige of all.
From a business point of view, management also has a perspective of what value
entails, be it higher profits, a bigger market share, more brand loyalty, market or product
expansion, improved product quality, or a combination of these. Within the value chain
context, a business aims to get value from their partners in the value chain, but also
needs to deliver maximum value to them to strengthen the relationship. It is a matter
of generating maximum value for themselves and the other value chain participants,
which in the process generates maximum value for final consumers.
Value for consumers

A few practical examples will highlight what value means to customers. If a person (a
customer) feels overworked, a need exists to take a break, which a travel agent could
solve. Feeling that your house is too cluttered gives rise to a need for space, which may
be solved by a bigger house, which an estate agent could solve. Feeling hungry leads to a
need for food, which a food retailer or restaurant could solve. A manufacturer struggling
to operate a piece of heavy machinery gives rise to a need for assistance, which the
machine supplier may address through training and support. A person not being able
to get from A to B gives rise to a need for transport, which a transport company could
meet. Children not being able to swim due to a dirty swimming pool gives rise to a
need for clear water, which a pool shop, hardware store or supermarket could satisfy. A
person feels sick, which gives rise to the need to feel better, and a doctor or pharmacy
could provide the means to do this. These examples reflect the adage that customers buy
benefits or solutions and suppliers sell product features. In all the cases above, there is
more than one solution to the problem or need that the consumers have.

The value that a customer receives through a transaction is determined by the match
between the benefits or solution that they are looking for – like a clean swimming pool
or an enjoyable getaway – and the cost of acquiring the solution or benefit. The cost of
acquiring the benefit or solution is in many cases more than just the price the consumer
pays. Things like the travelling effort, the product’s ease of use, the cost of after-sales
support and the general service (or lack thereof) are also ‘costs’ that the consumer
considers. Price is therefore too limiting, and one should rather talk about the sacrifice
a consumer makes in acquiring a product. A very important point to remember is that
consumers do not only perceive value differently, but also the relationship between
the benefits received and the sacrifice made. Figure 6.1 shows different relationships
between benefits received and sacrifices made by consumers.
Which of the following definitions of value best align with your definition?
Definition 1 Value = Benefits Cost
Benefits
Definition 2 Value =
Cost
Definition 3 Value = Benefits
Figure 6.1 The value equation

Source: Adapted from Abedi, 2016
What do these relationships between benefits and sacrifice mean? The first one in
Figure 6.1 is applicable where there is hardly any difference between competitive
offerings, and it is a case of ‘either the one or the other’. In this case, the benefits provided
by competitive products are very similar, but the sacrifices customers need to make may
differ. Consumers would then buy the ‘cheapest’ one, if possible. The most common
products falling in this category are commodity products. A commodity product
is usually a basic raw material that serves as an input in the production process of
manufacturing companies, and includes products such as raw sugar, copper, crude oil,
wheat, and gold. Hardly any differences exist among commodity products, and they
all only adhere to minimum marketplace requirements. Many low-value consumer
products could also be regarded as commodities if consumers are unable to distinguish
between the features of different brands when a product is taken off the shelf.
The opposite is true in the case of the second relationship, where benefits and
sacrifices are shown as a ratio. In this case products are highly differentiated, as well as
the applications of the products, and consumers must do more work to decide which

product will deliver the required value in terms of the benefits received compared to
the financial and other sacrifices that need to be made. For the final consumer this
evaluation depends on the cost output, the importance of the product for the consumer
(in comparison with their financial abilities), and past experiences with the product.
Let’s look at an example: Consumers with swimming pools at home are probably in
the higher echelons of society. When buying pool cleaners (like Kreepy Krauly), prices
range from R700 to R1 400. An affluent consumer may buy a well-known brand that is
more expensive but has a proven track record. The more discerning buyer will may feel
that paying more is not always an indication of better quality. Obviously, the ratios of
these customers differ, and the marketer will aim to widen the gap between the benefits
delivered and customer sacrifices.
The third relationship shown in Figure 6.1 is what all marketers aim for, where only
the benefits of their product are important to customers. In this case, the consumers
show strong brand loyalty and even brand insistence. The author is aware of a family
where all its members are Toyota fans – to the extent that the family, with working
children, has seven Toyotas among them! In their case the sacrifice they make only
depends on the income – this is exactly what Toyota aims for.
Keep in mind that value can be physical or intangible and real or perceived. The total
product package or value offering that an organisation delivers to its customers seldom
consists of just physical elements. In most cases products are accompanied by services
before, during, and after the sale is made. Because the physical features of competing
products are becoming more and more similar (due to technological advances that
allow competitors to copy each other’s unique features more easily), organisations are
relying more and more on intangible features to differentiate them from rival firms.
In many cases organisations regard customer service as their strongest competitive
tool. Whether this product feature (or value proposition) is sustainable as competition
intensifies is debatable.
Also keep in mind that in the case of pure service products most of the product
features are intangible. In this case it is even more difficult to ensure that consistent
added value is delivered to customers due to the variability in standards which is a
primary characteristic of service products.
The question of whether product differentiation, or additional value, could be based
on perceived (or even imaginary) advantages is contentious, but needs to be considered.
Positive brand associations could be based mainly on an organisation’s outstanding
promotional effort, without the real product or value package being much different
from that of competitors. Strong business relationships between a supplier and their
customers could also heighten the entry barriers for competitors, even if they have more
value to pass on to the customer than the incumbent supplier. An effective marketing
strategy is necessary for a firm whose value proposition includes intangible elements or
perceived value.

Value for businesses

In the previous paragraph two dimensions of value are mentioned, namely value for
customers – a relationship between benefits and sacrifices. Mention was also made
that the value that a business generates for itself (business value) is determined by the
value that customers gain from its products (customer value). In short, it comes down
to the following: ‘We as a firm generate the most value for ourselves if we generate
the most value for customers and other stakeholders’. Marketing, as a boundary-
spanning function of an organisation, plays a crucial role in ensuring that both its own
value and that of its customers and other stakeholders are maximised. Market
intelligence allows the marketer to ensure that customers receive maximum value,
which translates into maximum value for the business, provided its operational and
strategic actions are sound. In the section that follows the role of value creation in a
business firm is discussed.
Value as a strategic objective

According to the Institute of Value Management, the exercise aims to establish a
desirable balance between the wants and needs of stakeholders and the resources
needed to satisfy them.1 Another financially based approach to value creation is that it
is an attempt at creating optimum share value for the company’s owners. The Institute
of Chartered Accountants makes the following point about value creation: ‘Although
exceeding customer expectations is a worthy goal, companies recognise that exceeding
those expectations profitably is necessary for long-term corporate viability’.2
However, when viewing value management from a marketing point of view, it
is regarded as the effort by a firm’s management to create value for themselves (the
owners) as well as their external stakeholders. Jorgenson goes as far as to say the
following: ‘Business begins with value creation. It is the purpose of the institution: to
create and deliver value in an efficient enough way that it will generate profit after cost’.
This definition implies that the main purpose of a business is to create value (through
manufacturing and organisational processes), sell it to customers, and capture some
of that value as profit. Hillstrom agrees, stating that value creation, for customers as
well as the organisation, is increasingly regarded as a better management goal than
financial performance, which in many cases leads to cost-cutting as a primary goal,
rather that facilitating long-term investments that result in enhancing competitiveness
and generating business growth.3
What does it boil down to? Businesses that can solve customers’ problems,
requirements or wants by providing better net value (benefits or solutions as
compared to sacrifices) than competitors will in most cases be more profitable. Value
is strongly related to concepts such as ‘sustainable competitive advantage’, ‘product
differentiation’, and ‘unique selling proposition’. These concepts also reflect on a
firm’s ability to present customers with something that they regard as more valuable
than competitors’ offerings. For instance, a sustainable competitive advantage (a
concept originally coined by Michael Porter4 in the 1980s) can be defined as a strong
position that a company holds over its competitors based on a lower cost profile (cost

advantage), or on delivering a superior product or service to customers (differential

advantage). Both cost and differential advantages are based on factors such as
access to natural resources (such as high-grade ores or a low-cost power source), a
highly skilled or dedicated labour force, a better geographic location, access to new
technology, enjoying strong brand equity, a better marketing campaign or higher
economies of scale. These factors driving a unique competitive advantage are also
called ‘value drivers’, which will be discussed later.
Product differentiation, in turn, is defined as an organisation’s attempt to make
their product stand out from competitors’ offerings through enhancing some product
feature(s), be it physical or intangible. Lastly, a unique selling proposition, or unique
selling point, conveys a single unique benefit to the consumer that stands out as different
from competing products, and which forms the cornerstone of the company’s branding
and promotional strategies.
Another question to address is whether all value dimensions must be unique in the
eyes of customers. The answer is: no. Keller et al make the point that an organisation’s
points of differentiation are not enough to sustain a product against competitors. It must
also maintain the features that the product has in common with competitive products.
These are product features where the organisation merely ‘breaks even’ with competing
brands. The value that is offered to customers therefore has ‘points of difference’, but also
‘points of parity’. The points of parity are those product features that the organisation
believes do not drive the brand loyalty of present and potential customers.
Value creation within a supply chain

In the sections above we have looked at two perspectives of value, namely value created
for customers (customer value) and value generated by the supplier organisation for
itself (business value). Customer value and business value can be applied in the supply
chain which consists of organisations that are both customers and suppliers.
Regarding value creation for multiple parties in the supply chain, Bititci et al say
the following: ‘an organisation in satisfying its customers’ expectations, should be
creating wealth for its shareholders; hence creating value for both parties. Accordingly,
value creation in collaborative organisations should be a win-win-win situation for all
parties concerned. The partners should each benefit from collaboration by increasing
internal value to their shareholders as well as delivering better value (external) to the
end customer’.5
The Institute of Chartered Accountants makes the following point about the dualistic
perspective of value creation: ‘Although exceeding customer expectations is a worthy
goal, companies recognise that exceeding those expectations profitably is necessary for
long-term corporate viability’.6
Both statements above reiterate that creating superior value for customers depends
on the extent to which it will also create additional value for the supplier: directly, in the
form of increased profits, or indirectly, in the form of a bigger market share, stronger
and enduring customer loyalty, higher prices, creating growth opportunities, and
strengthening brand awareness.

The drivers of value

A large business consultant, Krogger&Co, makes the following point regarding the
creation of business value and customer and shareholder value:
For many companies creating long-term business value is obviously an explicit
objective – yet, only a handful of them can actually identify with precision those
factors that have the largest impact on such concept – let alone, link these factors
to concrete activities management should focus on to maximize it. The quest for
long-term business value starts therefore, with a clear understanding of those
variables that actually create value in a significant way: the key value drivers. And
for these drivers to be useful, they should be controllable or at least manageable
to a certain degree.7
The crux of this statement is that the key to value creation is first to identify the key
factors (the value drivers) that create value for the business and customers, and secondly
to link business decisions, activities, or resources to these value drivers.
Therefore, a distinction must be made between the decisions, actions, and resources
that are used to create value and the value that is eventually created. This distinction is
a subtle but an important one, as there is a causal relationship in play. The focus here is
on the key success factors that determine (cause) whether a business is successful, the
sustainable competitive advantage that it enjoys is the result (effect) of the use of these
factors. The drivers of value, therefore, relate to the key success factors as the driving
forces of business success.
According to Sá and Hambrick, critical success factors are the activities that an
organisation is expected to carry out towards the achievement of organisational vision.
Another perspective is that critical success factors are the basic decisions taken, activities
performed and resources utilised that are necessary to be successful in the industry or
market. The list is long and can be added to depending on the circumstances of the
business and the market in which it competes. The most common of these factors are
the following:
Table 6.1 Key drivers of value creation

A viable business model A strategic vision and operational efficiency
Human resource skills and performance Robust financial management
Entrepreneurial leadership and Access to critical resources
motivation Market and competitive intelligence
Innovation orientation and application of Scale advantages through a viable market
strategic and operational networking focus
Customer orientation Competitive product features
Key monitoring systems Suitable organisation structure
Elaborate market segmentation and Marketing and branding proficiency
targeting exercise
Enduring relationships with key channel
partners

This list is far from exhaustive, nor is it applicable to all organisations and within all
industries or markets. In fact, a key step in the process for developing internal and external
value is to identify the key drivers of value creation applicable to the organisation. The
process below shows the steps in selecting the organisation’s value drivers and managing
them in such a way that maximum value is created.
Select the key value drivers that impact on value creation
Establish what the desired direction of change for each value driver is
Identify the actions to be taken to affect the desired direction of each value driver
Assign clear responsibilities for implementing the actions to be taken
Measure the value created by, or impact of, the value drivers
Continuously review the validity of key value drivers
Figure 6.2 Value-driven management

Source: Adapted from Krogger&Co, 2015
From the list of key drivers in Table 6.1, one is of particular importance to supply chain
management, namely Strategic and operational networking.
Ward defines business networking as the process of establishing a mutually beneficial
relationship with other business people and potential clients and/or customers.8
Metrega et al define business networks as social and economic processes through
which individuals and organisations develop lasting relationships with particular sets of
stakeholders for the purposes of accessing support and facilitating exchange.
In both these definitions the establishment of relationships between business
people/stakeholders and between businesses is mentioned. Two stakeholder groups of
an organisation which are identified by most academics and practitioners are customers
and suppliers. Together these parties form the supply chain. Therefore, business
networks incorporate the establishment of relationships between channel partners
(individual and businesses) in the supply chain. This is the second topic of the chapter.

Relationship management
In this section business relationships are discussed as one of the key determinants in
value creation. First, the point is made that not all channel relationships necessitate a
close relationship between channel partners. Thereafter, the relationship spectrum is
discussed in terms of the three generic relationship types, as well as the characteristics
of each type.
Defining relationship management

In defining relationship management a clear distinction must be made between this
concept and that of a collaborative relationship. The following definitions of relationship
management, or customer relationship management/marketing, clearly focus on one
type of relationship that exists in the relationship spectrum and therefore should rather
be regarded as definitions of a collaborative relationship. Shani and Chalasani define
relationship marketing as ‘an integrated effort to identify, maintain, and build up
a network with individual consumers and to continuously strengthen the network for
the mutual benefit of both sides, through interactive, individualized and value-added
contacts over a long period of time’.9 Another definition is: ‘Relationship management
aims to create a partnership between the organization and its audience rather than
consider the relationship merely transactional’ (author’s emphasis).10
We believe that relationship management should be defined more broadly and
incorporate different kinds of relationships that suppliers could establish with their
customers. One such definition reads: ‘relationship marketing refers to all marketing
activities directed toward establishing, developing, and maintaining successful
relationships’ (author’s emphasis).11 Another author defines relationship management
as ‘a strategy in which an organization maintains a continuous level of engagement with
its audience. This management can happen between a business and its customers or
between a business and other businesses’.12 In these two definitions the focus is not on
the strengthening of relationships, but rather on managing relationships.
Based on the definitions above, we believe that the following definition serves as
a good point of departure: ‘Relationship management is an approach for managing a
company’s relationships and interactions with parties up and down the value/supply
chain for the benefit of all parties concerned’.
The antecedents of business relationships

Different meanings are attached to the term ‘antecedent’. It can be seen as something
preceding (coming before) an event or state, or as a condition for an event or state to develop
or exist, or as the cause that leads to an event or state happening. Within the context
of relationship management, antecedents will be regarded as market, organisation,
and inter-organisation conditions that determine the type of relationship that should
be maintained between two channel partners. From Table 6.2, factors such as barriers
against competitor intrusion, availability of product alternatives, and the dynamics of
the supplier’s and the buyer’s environments are market factors that will determine the

type of relationship that is most appropriate. Factors applicable to the individual partner
firm are its perception of the benefit accruing from a closer relationship, its investment
in or commitment to other relationships, its relational orientation, and the importance
of the product, while existing relational linkages and quality, current communication,
and organisational compatibility are inter-organisational conditions that impact on the
level of collaboration that will or should take place. The more of these factors are present
in the dealings between suppliers and buyers, the closer and more collaborative the
relationship could potentially be. In the section titled ‘Types of business relationships’
below, some of the reasons why collaborative relationships fail are discussed. Many of
these reasons are due to the absence of one or more of the factors shown here.
Table 6.2 Market, organisational and inter-firm conditions impacting on relational intensity
Trust/benevolence Relational orientation/management buy-in
Power/governance Exit barriers for supplier or buyer
Existing relational quality Mutual and relative commitment in
Sophistication of communication systems terms of resources, knowledge and time
Potential for conflict resolution State of information technology and
market intelligence
Compatible goals/goal congruence
Market dynamics
Perception of benefit (value)/outcome
certainty Importance of purchase for the buyer
Mutual interdependence/organisational Complexity/importance of purchase
compatibility Existing inter-firm operational linkages
Requirements for structural and social Entry barriers for competitors
bonds Availability of product alternatives
Investment in alternative (other) Supply and demand dynamics
relationships
Types of business relationships

As indicated above, many academics and practitioners erroneously believe that the concept of
relationship management or customer relationship management/marketing (CRM) focuses
on the movement from a transactional orientation towards a collaboration orientation and
subsequently focuses on the advantages that a collaborative relationship holds for both
the supplying and the buying firm. Relationship management, or customer relationship
management, should rather be seen as an effort to realise a particular position between
business partners on the relationship spectrum that are shown in Figures 6.3 and 6.4. The
circumstances in a market, and of the participants in the supply chain, determines the type
of relationship that the organisation (be it a supplier or buyer) should pursue with a specific
business partner. These relationship drivers (also called antecedents) are discussed in the next
section. The specific market and business characteristics may point towards a transactional
relationship between two channel participants, while in other cases a close working
relationship between channel partners may be sought by one of the parties, or by both.

In Figure 6.3, Day’s relationship spectrum shows three relationship types, from where
a supplier and customer keep a distance between them when doing business and each
transaction is regarded as a once-off event (transactional exchange), to where close ties
are fostered between the parties in order to increase the value that each member gains
from the partnership (collaborative relationships).
Transactional Value-added Collaborative

exchanges exchanges exchanges
Anonymous transactions/ Complete collaboration and integration of

automated purchasing supplier with customer or channel partner
Figure 6.3 The business relationship spectrum

Source: Day, 2000: 25
Webster’s range of marketing relationships shows a range from arm’s length relationships
to joint ventures (strategic alliances) and vertical integration, which represents some
form of co-ownership between participants in the supply chain. In between are three
types of relationship options. This spectrum is shown in Figure 6.4:
Partnerships
Arm’s Joint Vertical

Type 1 Type 2 Type 3
length ventures integration
Figure 6.4 Range of marketing relationships

Source: Webster, 1992
The three partnership-based relationships that Webster identifies are:

Type 1: These channel partners coordinate activities on a limited scale, the
relationship has a short-term orientation, and it involves only a single function/
division within each organisation.
Type 2: This relationship between organisations goes beyond merely coordinating
joint activities to an integration of these activities. This type of relationship has
a longer-term time horizon, but the aim is not for it to become a permanent
agreement. Multiple functions are involved in this relationship. Types 1 and 2
respectively correspond with Day’s ‘transactional’ and ‘value-added exchange’13

categories shown in Figure 6.3.
Type 3: In this case the channel partners aim for a significant level of operational
integration on a permanent basis. The two firms regard each other as an extension
of one another. This correlates with Day’s ‘collaborative exchanges’ category.

The three types of relationships are discussed in more depth below.
Transactional relationships (exchanges)

Many academics and practitioners convey a negative picture of transactional marketing
as one where marketers are not customer-oriented. Statements like the following are
common regarding this relational approach: ‘Price serves as the sole factor in the vast
majority of purchases based on transactional marketing. Factors such as quality of the
product or the competence of customer service play no role’;14 ‘Transactional Marketing
refers to the promotion and selling of the product with little or no concentration
over customer value and satisfaction, and tries to make new customers every time’;15
and ‘Adversarial/opportunistic relationships are characterised by an arm’s length
communication approach and adversarial (competitive) attitudes, focus on price
reductions, emphasis on individual transactions and reluctance to share information.
These strategies can achieve price reductions in the short term. In the long term,
however, they may not be sustainable since most value-adding strategies (eg innovation)
can hardly be achieved if the supplier/buyer focuses only on price’ (author’s emphasis).16
Day states that transactional relationships ‘include the kind of autonomous
encounters a visitor to a city has with the taxi or the bus from the airport, as well as a
series of ongoing transactions in a business-to-business market where the customer and
supplier focus only on the timely exchange of standard products at competitive prices’.17
The following pointers are the key characteristics of a transactional relationship:
One of a series of independent deals. Each transaction is entered into as an
independent deal and judged on its own merit.
Information and business data sharing by means of integrated information systems
between parties are not pursued.
Price is a key factor in the transaction between buyer and seller.
The least time and effort are spent on making the transaction. The transaction leans
towards a straight rebuy purchase situation.
Buying decisions are taken at a lower hierarchical level.
Buying and selling are more structured, formal and inflexible.
Suppliers are seldom willing to adapt the product to the unique requirements of the
individual buyer.
Other features of a transactional exchange are that the market consists of many suppliers
and buyers that are highly competitive, and the supplier’s product is seldom an integral
part of the buyers’ product or operational systems. On the other hand, buyers are many
– often a mass market buying a common consumer product. Promotional efforts are
often focused on point-of-sale interactions by using discount coupons, cash-back offers,
bonus giveaways and specials to generate more immediate sales, while membership
programs, loyalty rewards and points-per-purchase systems are used to generate volume
purchases. These promotional strategies also contribute to reducing inventory that is
expensive to hold and manage.18

In business-to-business markets, the product is usually used in the general operations

of the buying firm, and not as part of the manufacturing process of the organisation.
Suppliers often sell the same product in the final consumer market, like furniture,
personal computers and laptops, stationery, vehicles, and airline tickets.
Value-adding exchanges
In Figure 6.3, the middle position in the relationship spectrum represents an effort
by buyers and sellers to work more closely together, to address the uncertainty of a
stable supply or market. For suppliers the dangers of frequent changes in customer
requirements and product applications necessitates a closer working relationship with
them to ensure that products and services are adapted to accommodate these changes.
The selling firm realises that retaining customers is as important as initially attracting
them. Customer loyalty becomes a key requirement for survival. Suppliers realise that a
comprehensive understanding of customers’ buying and usage behaviour is necessary,
and that avenues of product differentiation should be investigated to accommodate the
differences between buyers.
Suppliers accept that marketing standardised products is not what their customers
want. The characteristics of the particular market (in terms of the number of customers,
importance of the product, availability of alternatives, and product’s features) will have
an impact on the level of differentiation that the supplier has to pursue. The concept of
‘mass customisation’ reflects the demand by customers for tailor-made products and
services. Mass customisation aims to combine the low unit costs of mass production
with the opportunity for individual customisation. Products are differentiated to satisfy
the requirements of groups (segments) of customers without increasing unit costs much.
Usually the adaptation of products is done at the latest possible point of manufacturing
or distribution.
Likewise, buyers of raw materials, intermediary products and finished products
are increasingly moving away from using multiple suppliers of standardised products.
According to Noori and Radford:
There are a number of current trends and approaches that managers and
practitioner of a supply chain may consider to achieve a competitive edge and
Single Sourcing is one of them! … A long-term relationship with a single supplier
of a specific product or group of products results in benefits to both the supplier
and the manufacturer.19
They cite the following advantages emanating from buyers choosing single suppliers
and suppliers pursuing mass customisation:
Administrative efficiency through less soliciting and reviewing of suppliers’ bids,
fewer contracts to negotiate and renegotiate, reduced paperwork through blanket
purchases and more streamlined accounting operations
Lower inventory cost through delivery of small lots and subsequent lower inventory
levels and faster quality inspection
Improved product quality through closer cooperation

Access to new technology through shared product design

Simpler production planning and better utilised production capacity.
Collaborative relationships
In cases where a collaborative relationship between channel partners can contribute
to added value for themselves and for the final consumer, it could well become a key
factor in an organisation’s success. However, most efforts at creating a collaborative
relationship fail, mainly because the relevant parties are unsure whether collaboration
would in fact contribute to added value.
Defining collaborative relationships
Collaborative relationships occupy the position on the relationship spectrum (shown
in Figure 6.3) where a business firm and its channel partners (be it intermediaries or
final customers) maintain strong and extensive social and technical ties in an attempt
to lower total costs and/or generate increased value for both parties.20 This definition
focuses not only on the technical ties between multiple functional divisions of the
channel partners, but also on the social ties between them. Technical ties refer to the
operational linkages that are established by the collaborative partners in areas such as
sharing information systems, streamlining logistics, linking manufacturing systems,
doing joint marketing, integrating research and new product development, and sharing
scarce resources. Regarding the social ties between business partners, Mole (an expert
in collaboration) says the following:
‘… Strong ties, in particular, deliver a rich, timely, specific, and relevant stream
of resources to the entrepreneur. Spending time on building friendships, on
socialising with people, on earning their trust by going the extra mile for them,
can be seen as a substantial investment in one’s venture’; and ‘an open and even
altruistic willingness to embed oneself in a network of mutually-supporting
relationships, and to live up to one’s commitments to network partners, is a key
element in the entrepreneurial process….’21
Having strong social ties with channel partners provides many benefits to the entrepreneur,
including being recognised as trustworthy, professional and accommodating, and
consequently gaining access to sensitive information, sharing skills and resources, and
enjoying preference over competitors.
Collaboration – a key strategic tool
Laura Horvath, at the time Product Marketing Director of the Oracle Corporation,
made the following observations:
‘… As global markets grow increasingly efficient, competition no longer takes
place between individual businesses, but between entire value chains’; and
‘optimizing entire supply chains will require a level of information sharing and
collaboration among enterprises previously unknown in most businesses….’22
Gary Hamel, one of the world’s leading experts on business strategy, proposes that an
organisation’s business model (its basic business approach) should contain four major

components, namely a core strategy indicating where and how to compete, strategic
resources to be utilised, a customer interface to be established, and a value network
of companies surrounding the business which complements and amplifies its own
resources.23 According to Hamel, the value network consists of suppliers, partners
and other key stakeholders who contribute resources to the network. He therefore
regards the management of an organisation’s value (supply) chain as one of the four key
ingredients of a business’s existence and survival.
What does this mean? The success of organisations in a particular market place
will in future be determined not by how effectively they compete with each other on
a one-on-one basis, but rather in terms of how their separate supply chains perform
together in generating value for the common target market they serve. Supply chain
management aims to coordinate the business activities across businesses to improve the
performance of the individual participants as well as of the supply chain as a whole. The
result of this effort should be that maximum value is accrued for the final consumer.24
The integration of the activities of key participants in the supply chain is best realised
by forging stronger supply chain relationships, and more specifically by pursuing
collaborative relationships.25 The acid test of these collaborative efforts is whether the
additional value that it generates leads to an increase in customer support. Remember,
though, that establishing and managing collaborative relationships between channel
participants is not the only avenue for value being added to the product. (In this regard,
see the value drivers that were discussed earlier under ‘The drivers of value’.)
Collaborative exchanges take place where suppliers and buyers work closely together
because the product being provided is complex, non-standardised and important to the
buying firm. Many markets are dynamic because a few suppliers vie for the support of
a few buyers – most frequently in business-to-business markets. Supply firms therefore
want to establish long-term support from clients, among other reasons to create exit
barriers for these customers as well as entry barriers for competitors. In turn, such market
conditions lead to supply uncertainty for buyers (because of the few suppliers) which
they need to overcome. This is done by becoming an important client to the supplier
firm. Due to the importance of a long-term relationship for both parties, multiple
contact points between them are established to ensure that financial or other benefits
accrue for both parties. These linkages are established across many functional divisions
of both organisations, from product development, manufacturing, and operations to
purchasing and logistics, information technology, and marketing.
Fawcett and Magnan mention another important reason for collaborative relationships to
be pursued: ‘aligning of objectives and integration of resources across company boundaries’
is particularly important for organisations that lack the resources to compete effectively
on their own.26 Sahay states that there is increasing interest in inter-firm relationships as
more firms rely on resources outside their own firm to compete successfully. He believes
that better use of human, capital and raw material resources between channel participants
can serve as a key driver for cost reduction, a catalyst for growth in revenue, and a source
for greater customer satisfaction.27 Deloitte UK says the following in their Outsourcing
Handbook: ‘Love it or loathe it, outsourcing is now a permanent feature of business life. As
companies search for cheaper and more effective ways of working, handing over non-core

functions to lower cost specialists can be an alluring prospect’.28 According to Dominic King,
Global Research Manager of Grant Thornton, businesses which outsource are primarily
looking for improving operational efficiencies, to reduce costs (inter alia by utilising
low-cost labour), to allow staff to focus on core strategies, to access expertise that is not
available in the organisation, and to reduce the risk of losing key personnel.29 In many cases,
nowadays, even core functions of a business are outsourced. Michael Evans identifies six
areas that businesses consider outsourcing, of which the first five could usually be regarded
as key functions: manufacturing through offshoring, finance and accounting, technologies,
human resources, sales and marketing, and fixed administrative centres.30
Customer relationship management as a new element of the marketing mix
Because many products and services that suppliers sell are not strategically important to
their customers, they need to convince them that closer ties will indeed provide them with
added value and enhance their competitiveness. This means that collaboration becomes
a component of the marketing mix. Since the 1980s, the 4 Ps marketing paradigm has
been criticised as not encompassing all the marketing activities. Gronroos, an esteemed
Finnish academic, postulated that relationship marketing should be a core ingredient of
the marketing mix, especially in business-to-business markets.31
A distinction can be made between customer (or business) relationship management,
which focuses on making strategic decisions and performing activities to establish and
manage relationships with clients, and customer relationship marketing, which refers
to promoting collaborative relationships as a key component of the supplying firm’s
market offering. Relationship marketing therefore serves as a marketing instrument,
alongside the traditional 4 Ps and the additional instruments of people, processes, and
physical evidence. In essence, it means that the marketing firm has to promote itself as
being able to deliver additional value to clients by establishing closer ties with them. The
aim is to prevent a customer from leaving the relationship and for competitors to find it
difficult to lure the customer away.
Richard and Jones make the point that successful customer relationship efforts (like
promoting closer relationships as a key ‘product attribute’) hold multiple advantages
for the incumbent organisation. They identify seven core benefits emanating from
successful CRM programmes, based on the results of a multitude of research projects
on the topic.32 These benefits are:
1. Improved ability to target profitable customers
2. Delivering products with multiple features through different channels
3. Improved sales force efficiency
4. Individualised marketing messages
5. Customised products and services
6. Improved customer service efficiency
7. Improved pricing strategies.

Why collaborative relationships fail

Although the related fields of supply chain management, customer relationship
management, and key account management have developed significantly over the last
few decades, academics and practitioners alike argue that its implementation in the
business field has shown inconsistent results in terms of both its theoretical development
and practical success.33 According to Chahal, various aspects of the behaviour and
perceptions of channel partners, when participating in collaborative relationships, need
to be clarified, especially in terms of how they see the collaboration contributing to
channel performance, their own performance, and the added value that is passed on to
customers.34
Channel partners are sometimes incapable of addressing the obstacles that prevent
the transition from a competitive to a collaborative relationship. Trust, a strong price
focus, and the required commitment of resources are obstacles to this transition. In order
to address this and other obstacles, Spekman and Carraway identify critical elements
that contribute to successful collaboration efforts: the development of competencies
(inter alia employee skills) for cementing collaborative cooperation, developing the
proper mindset for pursuing collaboration, adapting the organisational structure for
multi-functional cooperation, and ensuring that interacting processes and information
infrastructure exist to facilitate collaboration.35 The aspects that are mentioned here
are avenues in establishing closer cooperation between channel partners, but are also
obstacles to achieving it.
Other reasons for collaboration failure are that collaborative partners are not
committed to the goal of collaboration, that they have not accumulated sufficient support
in terms of vision, resources, or power, and that they lack the competence to manage the
complex set of strategies involved in sustaining a coalition effort. (These shortcomings
are discussed in full in: http://www.hunter.cuny.edu/socwork/ecco/coalition_project/j.
htm. You are advised to read this article.)
Cheryl Conner states that collaboration is unsuccessful when one or both partners’
current success gets in the way. ‘Typically, it’s when we’ve done well enough that the
need (and the urgent requirement) to collaborate doesn’t arise.’ She also indicates that
collaborative partners may be unable to resolve unanticipated problems or exploit
unexpected opportunities over the course of the project’s execution, or that asymmetries
between the parties cause a power struggle to develop.36
Most of the reasons cited above for collaboration failure stem from the fact that these
relationships need to be monitored, managed, and adapted continuously. It is not a case
of deciding to work together and believing that everything will be plain sailing.
Analysing customer profitability: Customer satisfaction and

cost-to-serve
Earlier we mentioned that not all business relations are destined to become entrenched
collaborations between channel partners. For instance, merely evaluating upstream
suppliers and downstream customers in terms of their contribution to the revenue and

profitability of the organisation may be enough to indicate that a transactional or value-

added relationship should rather be pursued. The point is that not all customers are the
same: on the one side of the spectrum there are high-cost-to-serve partners and on the
other side are low-cost-to-serve partners. Some large, but high-cost-to-serve channel
partners may be less profitable for the organisation than some smaller, but low-cost-to-
serve partners.
Three techniques have been developed to measure customer profitability: activity-
based costing (ABC), the lifetime value of clients and key account management (KAM).
Through ABC, the activities performed to serve a particular customer are costed in
terms of the resources they consume; then these costs are related to the revenue
generated by the customer. Measuring customer profitability by means of activity-based
costing, provides a measure of the cost and revenues realised with individual customers
over a specific period, up to the present, while the lifetime value is forward-looking by
discounting estimated future revenues from individual customers to their net present
value. The lifetime value of a customer reflects on the importance of the customer in
the years to come. Measuring the current profitability as well as the potential value of
individual customers will show the supplier firm where its efforts should be concentrated.
From a marketing point of view, these findings will determine the amount spent on
acquiring new customers and keeping existing ones, the level of customer support that
should be provided to each client, the extent to which the product should be adapted
to address individual requirements, and the labour resources to be spent to keep these
customers satisfied.
Findings about customers’ present and future profitability might show that some
customers need to be ‘fired’, some need to be maintained with a moderate investment
in time and resources, and some require special effort to ensure their continued loyalty.
These last-mentioned customers are earmarked to be key customers. Key account
management (KAM) is used as an enterprise-wide initiative to develop strategic
relationships with a limited number of customers in order to offer significant and
measurable additional value to these customers, with the aim of becoming a preferred
supplier to some, and to cultivate others towards a collaborative partnership.37 Although
many academics and practitioners regard key account management as a sales-oriented
instrument, it is in fact a company-wide initiative, involving multiple functionaries at
different hierarchical levels.
Customer profitability and relationship management

In Figure 6.5, the relationship between the cost to serve a particular customer or
customer group and the profitability generated from this customer or customer group
is shown.

Net price High

Carriage
Passive
trade
Bargain
Aggressive
basement
Low
Low High
Cost to serve
Figure 6.5 Customer classification matrix

Source: Shapiro et al, 1987: 104
Four types of customers are identified, with each demanding a different approach from
the supplier organisation:
Maintaining and increasing the profitability of certain customers, of which the
‘passives’ are the most important, as well as certain customers from the ‘costly-to-
serve’ and ‘price-sensitive’ quadrants (carriage trade)
Turning unprofitable into profitable customers, which are found in the ‘costly-to-
serve and ‘price-sensitive’ quadrants, to the right of the profitability line
Firing unprofitable customers, which are classified as ‘aggressives’ in the bottom
right-hand corner in Figure 6.5, as well as some customers in the ‘costly-to-serve’
and ‘price-sensitive’ quadrants.
The decisions taken about the four types of customers shown in Figure 6.5 will affect
the type of relationship the supplier will pursue with them. For instance, Hutt and Speh
say the following:
A company is indeed fortunate if several of its customers (in business markets or
segments of customers in final product markets) occupy the upper left-hand quadrant
of the diagram: high margins and low cost-to-serve. Because these customers
represent a valuable asset, marketing managers should forge close relationships with
them, anticipate their changing needs, and have protective measures (for example,
special services) in place in case competitors attempt to win them away.38

About unprofitable customers they further propose that the supplier must first attempt
to reduce the costs involved in serving these customers, encourage the customer to
work with them more efficiently, investigate other reasons why certain unprofitable
customers should be retained and determine the potential for customers to become
more profitable – as is the case with new customer entrants into the market. If the
answers to these questions are ‘no’, then the customers need to be ‘fired’ subtly.
The different types of customers (as shown in Figure 6.5) that an organisation decides
to serve (both current and potential) need to be analysed in terms of the relationship
they are prepared to forge with the supplier. Keep in mind that not all customers want
to forge a close relationship with their suppliers. Even the customers that are regarded as
‘passives’ in Figure 6.5 may feel that they want to keep all their suppliers at arm’s length
and pursue an adversarial approach in their dealings with them – ‘we want the best deal
and nothing else’.
SUMMARY
The primary aim of supply chain management is for the channel to operate at optimum
levels in terms of cost savings and generating added value for all participants, including final
consumers. As a matter of fact, generating value for the organisation is its raison d’être. The
organisation should therefore continuously look for opportunities to enhance the value that
it generates for itself within the ever-increasingly competitive environment prevalent in most
markets. However, realising satisfactory value for the business depends on the value that
it creates for its customers, be it the final consumer or another business in the distribution
channel (ie an organisational customer).
The value proposition made to downstream customers is also dependent on the value that
other participants in the value chain add to it. If the relationship between channel partners is
adversarial or opportunistic, generating maximum value is unlikely. Relationship management
is a tool for evaluating the current state of coordination between channel partners and for
developing closer ties if it is called for. Although most efforts at establishing collaboration
within the supply chain fail, a concerted effort by all parties to address the obstacles which
present themselves might render the supply chain more effective than rival ones. An integrated
supply chain might well become a competitive advantage for all its participants, and one
which could carry through to a superior position in the marketplace.
Review questions
1. Explain the key principles of value, the value equations and their impact on
value as a key strategic goal in an organisation.
2. Discuss the drivers of value, explain why they are regarded as key success
factors and how they are managed as a process.
3. Explain the relationship management spectrum and the three generic
relationship types.

4. Identify and discuss eight antecedents of relationship management.

5. Discuss the role customer relationship management plays as a new marketing
mix element.
6. Identify and explain five reasons why relationship management fails.
7. Discuss why measuring customer profitability is an important exercise in
managing collaboration with individual channel partners.
References
1 e Institute of Value Management. What is Value? What is Value Management? https://
Th
ivm.org.uk/what-is-value-management (Accessed: 7 July 2018).
2 The Institute of Chartered Accountants in England & Wales. 2002. Good Practice
Guideline 37: Customer profitability analysis. Download: https://www.icaew.com/-/media/
corporate/files/technical/business-and-financial-management/busines-support-functions/
marketing/customer-profitability-analysis-gpg-37-march-02.ashx (Accessed: 7 July 2018).
3 Hillstrom, LC. Reference for Business: Encyclopedia of Management. Value creation.
http://www.referenceforbusiness.com/management/Tr-Z/Value-Creation.html
4 Porter, ME. 1985. The Competitive Advantage: Creating and Sustaining Superior
Performance. New York: The Free Press.
5 Bititci, US, Martinez, V, Albores, P & Parung, J. 2004. Creating and managing value
in collaborative networks. International Journal of Physical Distribution and Logistics
Management, 34(3/4): 251–268.
6 The Institute of Chartered Accountants in England & Wales, op cit.
7 Krogger&Co. 2015. Key value drivers. http://www.krogger.co/key-value-drivers.html
8 Ward, S. 2017. The Balance Small Business. What Is Business Networking & What Are the
Benefits? https://www.thebalancesmb.com/what-is-business-networking-and-what-are-
the-benefits-2947183 (Accessed: 7 July 2018).
9 Shani, D & Chalasani, S. 1992. Exploiting Niches Using Relationship Marketing. Journal of
Consumer Marketing, 9 (3): 33–42.
10 Investopedia. Relationship Management. https://www.investopedia.com/terms/r/
relationship-management.asp (Accessed: 7 July 2018).
11 Dwyer, FR, Schurr, PH & Oh, S. 1987. Developing Buyer–Seller relationships. Journal of
Marketing, 51(2): 11–27.
12 Investopedia, op cit.
13 Day, GS. 2000. Managing market relationships. Journal of Academy of Marketing Science: 25.
14 Webster, FE, Jr. 1992. The changing role of marketing in the corporation, Journal of
Marketing, 58 (October): 1–17.
15 Dontigney, E. AZ Central: Your Business. The Disadvantages of Transactional Marketing.
https://yourbusiness.azcentral.com/disadvantages-transactional-marketing-20974.html

16 Uni Assignment Centre Transactional marketing https://www.uniassignment.com/essay-

samples/marketing/transactional-marketing.php
17 Day, op cit.
18 Burt, D, Dobler, D & Starling, S. 2003. World Class Supply Management: The Key to Supply
Chain Management, 7th ed. New York: McGraw−Hill: 81.
19 Noori, H & Radford, R. 1995. Production and Operations Management: Total Quality and
Responsiveness. New York: McGraw-Hill.
20 Hutt, MD & Speh, TW. 2013. Business Marketing Management – B2B International Edition,
11th ed. Cincinnati: South-Western.
21 Mole, K. 2012. Perspectives in Entrepreneurship. New York: Palgrave Macmillan.
22 Horvath, L. 2001. Collaboration: the key to value creation in supply chain management.
Supply Chain Management: An International Journal, 6(5): 205–207.
23 Hamel, G. 2002. Leading the Revolution. Brighton: Harvard Business School Press.
24 Richey, RG, Roath, AS & Whipple, JM. 2010. Exploring a governance theory of supply
chain management: barriers and facilitators to integration. Journal of Business, Wiley
Online Library.
25 Mentzer, JT, DeWitt, W, Keebler, JS, Min, S, Nix, NW, Smith, CD & Zacharia, ZG. 2011.
Defining supply chain management. Journal of Business Logistics. Wiley Online Library.
26 Fawcett, SE & Magnan, GM. 2002. The rhetoric and reality of supply chain integration.
International Journal of Physical Distribution & Logistics Management, 32(5): 339–361.
27 Sahay, BS. 2003. Supply chain collaboration: the key to value creation. Work Study, 52(2):
76–83.
28 Deloitte. 2013. The Outsourcing Handbook: A guide to outsourcing. Download: https://
www.deloitte.co.uk/makeconnections/assets/pdf/the-outsourcing-handbook-a-guide-to-
outsourcing.pdf (Accessed: 7 July 2018).
29 Grant Thornton. 2014. Outsourcing: driving efficiency and growth. https://www.
grantthornton.global/en/insights/articles/Outsourcing-driving-efficiency-and-growth/
30 Evans, M. 2015. Forbes: Entrepreneurs. 6 Key Areas To Outsource When Starting A
Business. https://www.forbes.com/sites/allbusiness/2015/04/13/6-key-areas-to-outsource-
when-starting-a-business/#437cc52fec7a (Accessed: 7 July 2018).
31 Gronroos, C. 1994. From Marketing Mix to Relationship Marketing: Towards a Paradigm
Shift in Marketing. Asia-Australia Marketing Journal, 2(1): 9–29.
32 Richards, KA & Jones, E. 2008. Customer relationship management: Finding value drivers.
Industrial Marketing Management, 37(2): 120–130.
33 Zablah, AR, Bellenger, DN & Johnston, WJ. 2004. An Evaluation of Divergent Perspectives
on CRM: Towards a Common Understanding of an Emerging Phenomenon. Industrial
Marketing Management, 33(6): 475–489.
34 Chahal, H. 2010. Two component customer relationship management model for healthcare
services. Journal of Service Theory and Practice. July: 343–365.
35 Spekman, RE & Carraway, R. 2006. Making the transition to collaborative buyer–seller
relationships: An emerging framework. Industrial Marketing Management, 35(1): 10–19.

36 Conner, C. Forbes: Entrepreneurs. Why Most Collaborations Still Fail (And

5 Ideas For Turning The Equation Around). https://www.forbes.com/sites/
cherylsnappconner/2014/02/17/why-most-collaborations-still-fail-and-5-ideas-for-
turning-the-equation-around/#7625640c61af (Accessed: 7 July 2018).
37 Hutt & Speh. 2014. 38.
38 Hutt & Speh. 2016. xx.

7: Behavioural processes in the
value chain 7
LEARNING OUTCOMES

yy Explain the marketing channel as a social system
yy Discuss the four key behavioural processes in the value chain
yy Describe the three main types of channel conflict
yy Explain the causes of conflict
yy Describe what is meant by channel conflict and efficiencies
yy Explain how to manage channel conflict
yy Discuss the bases of power for channel control
yy Describe the influence of role on channel efficiencies
yy Explain the behavioural problems in channel communication.
Introduction
In this chapter, a closer look is taken at the different behavioural processes within a
marketing channel. An understanding of all the behavioural processes is necessary to
gain insights into the effect they have on the effective functioning of the marketing
channel. A marketing channel is a social system within which a variety of economic
and behavioural activities take place. There is a lot of potential for conflict to arise,
which could impede the effectiveness of the marketing channel. This chapter therefore
focuses specifically on behavioural processes. The chapter starts with a discussion on
the marketing channel as a social system and then explores four specific behavioural
processes, namely conflict, power, role, and communication.
The marketing channel as a social system

A marketing channel is an inter-organisational social system. The social system is
generated by any process of interaction between individuals or collectives within the
marketing channel.1

A social system can be defined as a system generated by any process of interaction on

a sociocultural level between two or more actors. The actor is either a concrete human
individual (a person) or a collectivity.2 Social systems are described by the Political
Economy Framework as inter-organisational ‘collectivities’ of institutions and actors
seeking self-interest while at the same time pursuing collective goals.3
Marketing channels are primarily created to perform essential economic activities to
bridge the gap between production and consumption. The marketing channel that can
conduct this economic activity the most efficiently will be able to create a competitive
advantage in the marketplace.4 The Political Economy Framework depicts a marketing
channel with major economic and socio–political forces which affect the collective
channel performance and behaviour.5 The marketing channel as an inter-organisational
social system has two components, namely an internal and an external political economy.
The internal political economy consists of an internal economic structure (vertical
arrangements within the marketing channel) and process (decision mechanisms to
determine the terms of trade among channel members) as well as an internal socio–
political process (cooperation and/or conflict in the channel) and structure (pattern of
power–dependence relations among channel members). The internal economic structure
consists of a variety of arrangements which range from independently owned and
managed specialised units which transact across markets to multinational companies.6
These transactions are modified through formal and informal contractual arrangements
between parties. The internal economic processes are decision mechanisms, which
include decisions on the terms of trade and the division of the marketing function
between members in the channel. These decisions are made in impersonal, routine or
habitual ways; or through bargaining or centralised planning.7
The external political economy is the marketing channel’s task environment in which
the channel operates. This environment is complex, consisting of economic, physical,
demographic, cultural, psychological, technological, and political forces. The external
environment has a number of players (external actors), namely competitors, regulatory
agencies and trade associations. These external actors use and distribute power within
the channel. It is very important to understand the power relations and means of control
used between external actors and channel members; the power relations between
external actors; and the extent to which environmental forces control the activities of
channel members.8
Therefore, understanding that the marketing channel is a social system highlights
that there are underlying political and economic forces that do not exist in isolation.9
This social system with all its different relationships creates value for an organisation’s
customers through the use of integrated business processes (not individual functions
and processes) because it brings customers and suppliers closer together in the value
creation process.10 Marketing channels are therefore complex behavioural systems that
interact to achieve individual, company, and channel objectives. The focus of this chapter
is on the different behavioural processes that influence efficiency and productivity
within marketing channels. These behavioural processes are conflict, power, role, and
communication. The next sections take a closer look at these four behavioural processes.

7: Behavioural processes in the value chain 135
Behavioural processes
Conflict
Defining channel conflict
Traditionally when evaluating channel conflict, marketers took the competitive view
of marketing channels, due to the fact that each channel member has different goals
and strategies. When adopting the competitive view, the main focus is on the role that
power, conflict, and conflict resolution play in the functioning of the marketing channel.
A more recent view of marketing channels has been adopted, namely relationship
marketing. This view focuses more on long-term commitment and channel harmony.11
No matter how well a marketing channel is designed and managed, situations of
conflict will arise. Conflict is a constant phenomenon where the exercising of power
and the pursuit of differing goals and strategies are commonplace. Therefore, because
channel members are independent and even competing players/actors within the
marketing channel, conflict tends to arise.12 Channel conflict occurs when manufacturers
disintermediate their channel partners, such as distributors, retailers, dealers and
sales representatives, by selling their products directly to consumers through general
marketing methods and/or the internet.13 Disintermediation is the elimination of a layer
of intermediaries from a marketing channel or the displacement of traditional resellers
by radically new types of intermediaries.14 Channel conflict can also occur when there
has been over-production. This results in a surplus of products in the marketplace.
Newer versions of products, changes in trends, insolvency of wholesalers and retailers,
and the distribution of damaged goods also affect channel conflict.15
Marketing channels tend to operate smoothly when all members cooperate to
achieve maximum channel efficiencies. However, more often than not, channel
members operate as separate competing forces, focusing only on their own suppliers
and customers, missing vital links with other channel members.16
Conflict versus competition

Competition is an inevitable force that shapes and defines both consumer and business
markets.17 Channel competition arises when efforts are made by marketers within a
channel, or by channels as a whole, to establish dominance over other members in the
channel. These efforts could cause affected channel members to perceive that other
channel members are impeding the attainment of their own goals and strategies.18 The
automotive industry is a very good example: manufacturers are linked to independent
dealers to form a marketing channel (therefore a social system) for the distribution of
vehicles. The manufacturers record revenues and profits on delivery of the vehicles to
the dealers and push dealers to order more vehicles to ensure high revenue and profit.
This places a heavy financial strain on dealers, especially during times of slow retail sales,
when they are stuck with a large inventory. The dealers perceive the manufacturers’
actions as impeding their ability to control their costs, and manufacturers perceive
dealers’ reluctance as impeding their ability to grow revenue and profits, leading to
increased tension and frustration within the marketing channel.

Kotler identified three main types of channel conflict: horizontal, vertical, and multi-
channel.19 These are discussed in more detail below.
Types of conflict
Horizontal conflict
This conflict occurs among intermediaries at the same level of the marketing channel,
such as two types of retailers or two or more wholesalers. Horizontal conflict can
occur between vehicle manufacturers; between plumbing supply wholesalers; or
between supermarkets, for example.20 This type of channel conflict is commonplace
when intermediaries at the same channel level sell similar products, buy from the
same marketers/manufacturers, and sell to the same target market. Horizontal conflict
intensifies when these intermediaries operate in the same locations and the number of
intermediaries is relatively substantive, for example when franchising to many retail
stores too close to each other, decreasing each individual store’s profits.21 Horizontal
conflict is disadvantageous to the intermediaries involved, but invariably increases the
power of manufacturers. Horizontal conflict is the most visible and frequently discussed
form of conflict and is also referred to as competition.22
Producer
Wholesaler A Wholesaler B
Retailer A Retailer B
Final consumer
Horizontal conflict
Figure 7.1 Horizontal conflict

Vertical conflict
Vertical conflict occurs between channel members at different levels of the same
channel, such as retailers versus wholesalers, wholesalers versus manufacturers, or
manufacturers versus retailers. This is the most common form of channel conflict and
also the most severe.23 Channel members at different levels find many reasons for possible
disputes within the marketing channel, such as manufacturers bypassing retailers
and wholesalers, or when retailers develop products to compete with manufacturer
brands (private versus national brands), or when retailers request concessions that
manufacturers believe are unreasonable, for example on price. A typical disagreement
that can occur between a manufacturer and a retailer is about how much shelf space or

promotion effort the retailer should give the producer’s product.24 The extent to which
manufacturers want to control how many of their products are sold, to whom and at
what price has a direct impact on the rate of channel conflict.25
Producer
Vertical conflict
Wholesaler
Retailer
Final consumer
Figure 7.2 Vertical conflict

Multi-channel conflict
Multi-channel conflict arises when a manufacturer makes use of two or more marketing
channels to sell to the same market.26 Multi-channel distribution is becoming more
common. Organisations make use of multiple channels to expand their distribution
coverage within a market as well as to intensify the exposure of their brands. They might
also decide to add another channel to an existing marketing channel if they believe the
current marketing channel is not doing an effective job.27 This increases the competition
the existing channel members will encounter from other channels distributing similar
products to the same market. The level of competition will especially intensify when one
channel offers similar products to similar markets at lower prices, for example a store-
based clothing retailer versus a mail-order clothing retailer.28 Another example is that
when Estée Lauder set up their website to sell its Clinique brand directly to consumers,
Truworths might cut back the shelf space devoted to those brands.
Producer
Wholesaler Producer offers online sales
Retailer
Final consumer
Multi-channel conflict
Figure 7.3 Multi-channel conflict

Causes of conflict
Role incongruities
A role is a set of prescriptions defining what the behaviour of position members should
be. Therefore, if the different channel members’ roles, rights and responsibilities within
the marketing channel are unclear or poorly defined, conflict may arise.29 Franchisees,
for example, are expected to operate in strict accordance with the franchisor’s given
standard operating procedures. If the franchisee deviates from a specified role by
implementing some of its own policies and procedures without permission from the
franchisor, a conflict situation could arise. Another example is when a manufacturer
sells to a large account through its own sales force, and its licensed agents also try to sell
to that same account. It is often the overstepping of territories and boundaries within
a marketing channel by channel members (old-fashioned turf battles) that are a major
cause of conflict.30
Resource scarcities
Conflict can stem from a disagreement between channel members over the allocation of
resources needed to achieve their respective goals. The following scenario demonstrates
the conflict that may arise among channel members due to resource scarcities.31
Retailers in general are considered by both manufacturers and wholesalers as a very
valuable resource in achieving their distribution objectives. Manufacturers may decide
to focus on some of their high-sales volume retailers as house accounts (stores that the
manufacturer sell directly to). Wholesalers could object to this practice as they may feel
this is unfavourable allocation of a valuable resource – the retailer.32
Differences in perception
Perception is the way individuals select, organise, and interpret environmental stimuli.
The way in which these stimuli are perceived, however, is often different from objective
reality, but it is what that individual believes to be true.33 An example of differences in
perception in the marketing channel is when manufacturers and retailers have different
perceptions with regards to point-of-purchase (POP) displays. A manufacturer, who
usually provides POP displays to retailers, views them as valuable promotional tools
needed to create brand awareness and move more brands off the retailer’s shelves.
However, the retailer might perceive these POP displays as ineffective promotional
material taking up valuable floor space.34 Another example is when a manufacturer is
very optimistic about the short-term economic outlook and wants the intermediaries
to increase their inventories, but the intermediaries may have a more pessimistic
perception.35
Expectational differences
Expectations are certain standards that individuals hold against which they measure
things and behaviours.36 Members within the marketing channel have expectations
about the responsibilities and behaviour of other channel members, and some channel
members might not behave as expected, which might lead to channel conflict.37 An
example is when a car manufacturer offers extended warranties on vehicle transmissions

to customers. This will significantly reduce future revenue generated on transmission

repairs for franchisees offering this service. Franchisees might then require the parent
franchisor to reduce their royalty fees, while the franchisor might not agree as they feel
they need the higher rates to promote the business more aggressively.38
Decision domain disagreements
Channel members have very specific opinions on which type of decisions fall within
their decision-making domain. Channel conflict can occur when one channel member
takes decisions in a domain that another member believes belongs to them.39 Many
manufacturers feel that pricing decisions are in their decision-making domain.
Manufacturers prefer that retailers abide by their recommended retail price guidelines.
If retailers do not abide by their recommendations, manufacturers could threaten to
remove their product lines from the retailers’ shelves. However, retailers often feel that
by attempting to dictate pricing, manufacturers are encroaching on their decision-
making domain. This situation can cause conflict, especially if the retailer is in a highly
competitive market requiring flexibility in pricing.40
Goal incompatibilities between channel members
Channel members are independent maximisers of profits and their marketing
goals do not always correspond. Thus, in the process of achieving a certain goal,
conflict may arise. A manufacturer may want to achieve rapid market penetration
through a low-price policy, while the intermediaries may prefer to work with higher
margins and pursue short-term profitability.41 The goal of publishers of new books that
sell their products through amazon.com is to sell as much of their products as possible
through this online retailer. Amazon.com’s goal, on the other hand, is to sell as
much merchandise as possible from a variety of publishers and manufacturers that
provide the most revenue and profits. This may conflict with the goals of the publishers
of new books.42
Communication difficulties
Channel communication is in general a description of any linked way of communicating
between the manufacturer, the intermediary, and the end consumer in a marketing
programme.43 Conflicts can develop or grow if any members in the marketing channel
are uninformed or misinformed with regard to any important issues affecting channel
activities.44 An example is when franchisees send their royalty programme payments
to the franchisor on a monthly basis and then receive no information about how their
money is being spent to grow their business. The franchisor could face difficulties if
its franchisees feel a lack of support from the franchisor due to them feeling not
adequately informed.45
Channel conflict and efficiencies

Conflict, functional or dysfunctional, is inevitable in any system.46 The question is, what
effect does it have on a marketing channel’s activities and efficiency? Channel efficiency
is the degree to which the total investment in the various inputs necessary to achieve a

given distribution objective can be optimised in terms of outputs.47 More often than not,
conflict is viewed as paralysing to a marketing channel, but according to Imam most of
what is seen as conflict is healthy competition.48 Channel conflict can have a negative,
neutral, or positive effect on channel efficiency.
Negative effect – As the level of channel conflict increases, channel efficiency
decreases. A dynamic field of conflicting and cooperating objectives exists among
channel members. If the conflicting objectives outweigh the cooperating ones, the
efficiency of the channel will reduce dramatically. Channel conflict can become
destructive to channel efficiencies when, for example, an existing channel member
migrates to another channel, which reduces support for the manufacturer. If the
channel member is strong enough to hurt the manufacturer, channel efficiencies

will be impeded.49
No effect – This is where, regardless of the level of conflict in a marketing channel,
its efficiency remains constant. This situation exists in channels that are mainly
characterised by high levels of dependency among members. This dependency
forces channel members to cooperate even if their objectives do not always align.50
Positive effect – Conflict in the marketing channel might be the impetus for either
or both members to reappraise their policies and procedures. This can lead to an
increase in channel efficiency. The two parties in the channel reconsider the reason
for the conflict and decide on the reallocation of inputs based on the comparative
advantages of each channel member for performing the distribution tasks necessary
to achieve their distribution objectives. When a channel is in conflict, its members
often become more task-orientated and less concerned with individual members’
satisfaction. Conformity to channel goals and norms are at the centre of decision-
making. This also contributes to greater channel efficiency.51
Managing channel conflict

Channel conflict can be very constructive, creating opportunities for the marketing
channel to be more innovative and adaptive to the environment. Too much conflict
can be lead to a dysfunctional channel. Therefore, it is very important not to eliminate
conflict from the marketing channel, but rather to manage it wisely.52 Managing channel
conflict should be approached in three stages: detecting the conflict, appraising the
effect of the conflict, and resolving the conflict.53
Detecting conflict
Marketing channel discussions regarding conflict exist in every channel. A lack of these
channel discussions is often an early indicator of coverage gaps in the manufacturer’s
channel strategy. However, it does not mean that the channel is experiencing destructive
channel conflict just because different internal factions or channel members are
complaining about lack of manufacturer commitment or are uncomfortable with
competition for some sales. Increasing levels of discussions or evidence of declining
channel support for a particular manufacturer’s product line should be indicators to
pay attention to. There are some tools available to assist channel members in detecting

channel conflict such as regular surveys among other channel members on their
perceptions of the organisation’s performance; performing marketing channel audits;
and forming intermediaries’ advisory councils or channel members’ committees.54
Appraising the effect of the conflict
This is a subjective approach which relies heavily on the organisation’s judgement.
However, a growing body of literature is emerging to help channel managers develop
methods for measuring conflict as well as understanding its effect on channel efficiency.
As previously stated, presently, most channel managers measure conflict and appraise its
effect on channel efficiency at a conceptual level, and this relies heavily on the relevant
manager’s subjective judgement.
Resolving the conflict
Creative action on the part of a party to the conflict is needed if the conflict is to be
successfully resolved. Conversely, if conflict is simply ‘left alone’, it is not likely to be
successfully resolved and may get worse.55
There are some possible strategies available to the marketing channel in resolving
channel conflict. One way to resolve conflict is to have a super ordinate goal that is
acceptable to all channel members, such as survival, increased market share, customer
satisfaction, or high quality. This strategy is typically applied in situations when the
marketing channel is facing an external competitive channel threat, shifts in consumers’
preferences or lifestyles, and/or adverse legislation.56 Another strategy is to exchange
people between two or more channel levels. This brings about a better understanding of
the different members’ points of view. Channel managers also have the option of making
use of different product versions. Using multiple product versions gives management the
opportunity to target different market segments through different marketing channels.57
When the marketing channel conflict is very acute, managers could resort to
the following strategies to attempt to resolve conflict: diplomacy, mediation, and
arbitration. Diplomacy is when each conflicting side sends a representative or a group
of representatives to meet each other to discuss and resolve any possible causes of
the existing conflict. If diplomacy fails, managers can consider mediation, where the
two conflicting parties employ the services of a neutral third party who is skilled in
conciliating the affected parties’ interests. Should both diplomacy and mediation fail,
managers can resort to arbitration, where both parties agree to submit their arguments
to an arbitrator and commit to accepting the arbitration decision.58
Power
Defining power
Power is the ability of one party (influencing agent) to influence the intentions and
actions of another party (the target of influence). The potential for the power agent to
influence and bring about change depends on their ability to use the power resources
available. These resources are represented in the five bases of power.59 Different power
bases affect marketing channels in significant but contrasting ways.60 The following
section investigates these different bases of power.

Bases of power for channel control

Reward power
Reward power stems from the ability of the influencing agent to offer a positive incentive
to the target of influence if they comply to the required behaviour. Positive feelings
associated with the reward may lead to greater acceptance of the change and positive
feelings towards the influencing agents. A manufacturer could offer an intermediary
a specified discount for performing a specific task or function. The disadvantage of
reward power is that the intermediary will expect the reward every time the task or
function is performed.61
Coercive power
In coercive power, the influencing agent brings about change by threatening the target
with negative, undesirable consequences if the target does not comply with the expected
behaviour. This comes from the belief that a channel member can punish others for non-
compliance. A manufacturer could threaten to withdraw a valuable resource from the
marketing channel or terminate a contract if the intermediary does not cooperate. This
basis of power is used in situations where there are highly independent intermediaries
in a channel. Its disadvantage is that the intermediaries may organise countervailing
power. There is also a greater tendency for targets of coercive power to resent the
manufacturer exerting the power as well as resenting the required behaviour.62
Legitimate power
Legitimate power stems from the target of influence accepting the right of the agent
to wield influence and expect the changed behaviour. This power includes inherent
and legal forms. This is the belief that a channel member has the formal right to
make demands, and to expect others to be compliant and obedient. Terms such as
‘obliged’, ‘ought to’, ‘should’, and ‘required to’ may signal the use of legitimate power. An
example of legitimate power is when a manufacturer requests a specific action from an
intermediary warranted under a contract, and the intermediary views the manufacturer
as a legitimate leader in the marketing channel.63
Referent power
Referent power is when the target of influence views the agent as a model that they
would like to emulate. This is the result of a channel member’s perceived attractiveness,
worthiness and right to others’ respect. The agent is admired by the target and complying
with the required behaviour is not difficult for the target to do. Referent power implies
that one organisation desires identification with another organisation for recognition
by association. Therefore, if the manufacturer is highly respected by the intermediaries
they will be proud to be associated with them.64
Expert power
Expert power refers to the perception that one channel member has access to specialised
knowledge or skills that is valued by other members in the channel. Expert power is
strengthened when the channel members believe the holder of skills and knowledge

knows which behaviour is the most beneficial under specific circumstances. An example
is when a channel member is viewed as having product or process leadership within the
marketing channel.65
One channel member offers another channel member a

Reward power
positive incentive to perform a required task.
One channel member threatens another channel member

Coercive power with negative consequences if a required task is not
performed.
One channel member may expect another channel member

Legitimate power to perform a required task because it has been stipulated in a
signed contract or agreement.
One channel member wants to perform a required task

Referent power expected by another channel member due to the fact that the
latter is held in high regard by the former.
One channel member will comply with another channel

Expert power member’s requirements due to the fact that they believe the
latter is the expert in the marketing channel.
Figure 7.4 Bases of power
Using power in the value channel

In order to use power effectively within a marketing channel, the organisation must
choose which bases of power are the most appropriate to influence channel behaviour.
Bases of power is a function of specific situational circumstances as well as the size of the
manufacturer.66 The agent of influence’s motivation to use power is to achieve a specific
goal or outcome. The agent will then use the basis of power which will accomplish
that end most effectively.67 Expert and reverent power is more effective than threats
in conventional marketing channels in inducing channel members to accept change.
Power based on economic reward or coercion provides a higher degree of control over
channel members than legitimate, expert, or reverent power. According to Rosenbloom,
there are general findings with regard to the use or power in the marketing channel:68
Power must be exercised to influence member behaviour.
The effectiveness of bases of power to influence members is situation-specific.
The exercise of power and how it is used affects the degree of cooperation, conflict,
and satisfaction among channel members.
The use of coercive power probably promotes conflict and dissatisfaction to a
greater degree than other bases of power.
The use of coercive power can reduce a channel’s stability and viability.

Role
Defining role in the value channel
A role is a set of prescriptions defining what the behaviour of a position member should
be.69 Within the marketing channel, roles exist based on the various recognisable positions
in the channel. The marketing channel is viewed as a social system where its various
positions are occupied by specific members, such as manufacturers, wholesalers, and
retailers. Each of these positions has a set of clearly defined prescriptions that demarcate
what are acceptable behaviours for each of the relevant roles. For example, an acceptable
behaviour for a manufacturer is to maximise the product sales of their specific brand.
Manufacturers also compete for market share with other manufacturers who are selling
similar products to similar markets. This role also dictates that the manufacturer should
promote the brand aggressively to compete effectively in the marketplace.70
The role prescriptions for wholesalers are remarkably different from those of
manufacturers because of the position they occupy. For example, the wholesaler has a
number of manufacturers’ brands that requires their attention and the manufacturer’s
brand might be only one of those brands. The acceptable behaviour of a wholesaler
would be to compete profitably with other competing wholesalers. This will require the
wholesaler to build sales with the brands that are highly demanded by retailers.71
Roles in the marketing channel do not stay the same. They can and do change. Roles
provide all channel members with the basis for describing what specific behaviours
are expected from each channel member and what role the organisation should play
in the marketing channel. By developing more congruent roles among channel
members, channel managers are more likely to achieve a more effective and efficient
marketing channel.72
The influence of role on channel efficiencies

As indicated in the previous section, straying from a role may cause conflict. It is
important for channel members to understand that roles help describe and compare the
expected behaviour of each channel member and provide insight into the constraints
under which they operate. Here are some questions to help channel managers to ensure
that they understand the influence of role on channel efficiencies:73
What role does the channel manager expect a particular channel member to play
in the channel?
What role is this member expected to play by their peers?
Do the manager’s expectations for this member conflict with those of the member’s
peers?
What role does this member expect the manager to play?

Communication
Defining channel communication
Communication processes are a central part of all organisational functioning and are
critical to organisational success.74 Communication can be defined as both the informal
and the formal sharing of meaningful and timely information between members of
the marketing channel.75 Communication is ‘the glue that holds together a channel
of distribution’.76 Communication in the marketing channel can assist in transmitting
persuasive information, fostering participative decision-making, coordinating
programmes, exercising power, and encouraging loyalty and commitment.77
Communication also provides the basis for sending and receiving information among
channel members and between the channel and its environment. It can create a flow
of information within the channel that leads to an efficient flow of products/services
through the channel.78
Effective communication has managerial relevance, because ineffective
communication is the main root of channel problems. Conflict is also caused by
ineffective communication, which can lead to misunderstandings, mutual feelings
of frustration, and incorrect channel strategies.79 Communication improves trust by
resolving misunderstandings and disputes, as well as aligning goals and expectations.80
Behavioural problems in channel communication

A channel manager should try to identify any behavioural problems that tend to inhibit
the effective flow of information through the channel and resolve those problems before
the communication process in the channel becomes seriously distorted.81
Differing goals among channel members
All the different channel members do not always share the same goals. Some members
might share a goal to grow market share, but others may want to keep the status quo
due to specific conditions in the economic environment. Differing goals account for a
large part of communication problems specifically between large manufacturers and
smaller retailers.82
Language difficulties
Certain terminology or jargon is generally used by large corporate manufacturing
organisations. This situation is quite common when you are dealing with a large
corporate channel member dealing with a smaller wholesaler or franchisee. The
large manufacturer may use terminology or jargon that the smaller wholesaler or
franchisee is not familiar with. This will impede effective communication and could
lead to misunderstandings and miscommunication. It is very important for channel
managers of large organisations who are distributing products/services through smaller
organisations to ensure that they speak the same language as all other channel members
in their channel communication.83

Differences in perception
A situation may arise where channel members may perceive the same situation in
different ways. Differences in perception can distort the way messages are received.
One example is when a manufacturer uses terminology such as ‘reasonable price’ or
that products will be delivered in a ‘reasonable timeframe’ in their discussions with
wholesalers. What is ‘reasonable’ might be interpreted differently by the manufacturer
and the wholesaler. It is therefore important that channel managers do not assume that
all channel members necessarily know what the ‘standard practice’ is within the channel.
Ensuring that all communication in the channel is clear could have an overwhelming
impact on effective channel communication and thus on minimising potential conflict
and possible legal action.84
Secretive behaviour
Any form of secretive behaviour among channel members will inhibit effective
channel communication. This is especially true in situations where disclosures of any
kind are required. Manufacturers, for example, are often unwilling to disclose specific
details of their promotional plans to other channel members. Withholding details of
their promotional plans before its inception could exclude the manufacturer from
receiving potentially valuable feedback from other channel members with regard to the
appropriateness of the plan’s timing, as well as the availability of the channel support
required to ensure the successful implementation of the plan. There are various reasons
for secretive behaviour; for example, channel members may also be members of other
competing channels, and manufacturers would not want to have any information
leaks in the channel. However, results of secretive behaviour may be a less coordinated
channel, as well as channel members distorting or deliberately omitting competitively
sensitive information. Secretive behaviour might be necessary in some instances and
will occur in all marketing channels; therefore it should be carefully managed.85
Inadequate frequency of communication
The amount of communication refers to the frequency and/or duration of the contact
between channel members. Inadequate frequency of communication may leave channel
members feeling left out, as well as not receiving the necessary information. A minimum
level of contact is required between channel members to ensure adequate channel
coordination. There is also the danger of too much contact, where channel members are
overloaded, and this could lead to dysfunction in the marketing channel. The frequency
of communication may vary from one marketing channel to another and from one
channel activity to another. When assessing what the frequency of communication
within a marketing channel should be, the channel manager should examine the amount
of contact necessary to conduct the channel activity effectively.86

SUMMARY
A marketing channel is viewed as a social system with economic and behavioural processes.
This social system is affected by behavioural processes such as conflict, power, role, and
communication. Channel managers must have a clear understanding of each of these
behavioural processes. They need to understand their nature, their dynamics, the impact
they have on channel efficiencies, and how to manage the processes. This understanding will
enable channel managers to effectively incorporate the behavioural processes within their
decision-making.
Review questions
1. What is meant by the marketing channel as a social system?
2. What role does conflict play in the value channel?
3. Describe the types of conflict evident in value channels.
4. In what way can marketing managers attempt to manage the causes of
conflict within value channels?
5. Explain how marketing managers should manage value channel conflict.
6. Discuss the different types of power evident in value channels.
7. Describe situations where channel members use power in the value channel.
8. Provide practical examples of the influence of role on channel efficiencies.
9. What role does communication play within value channels?
10. Why is it important for a marketing manager to have an understanding of
the behavioural processes in the value chain?
References
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comparative analysis. Journal of Marketing, 44(1): 52–64: 56.
3 Stern & Reve, op cit, 54.
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8: Online channels and emerging
trends in value chain management 8
LEARNING OUTCOMES

yy Explain the types of online channels and intermediaries in value chain management
yy Discuss the emerging trends in value chain management.
Introduction
In a dynamic and changing business environment, organisations today deal with
increased competition both domestically and internationally through both traditional
and non-traditional channels.1 Organisations are pressured to deliver improved business
performance and customer service, and as a result have to evaluate and integrate the
resources and capabilities of their suppliers and customers and create superior value
and a competitive advantage that they must sustain over time.2 Online channels have
drastically changed the way that organisations do business with their customers, and
various emerging trends in business today are having a large impact on organisations
and how they conduct their activities.
In this chapter we will be discussing the types of online channels in value chain
management as well as the emerging trends in value chain management.
Online channels and types of intermediaries in value chain

management
Information technology (the internet in particular) has brought about great changes
in marketing practices. These changes have made marketing more efficient and effective
in reaching and selling to markets.3 Online channels are cheap to use by marketers,
mostly free to use by consumers, and can be updated frequently to convey a new message
every time.
Online channels in value chain management make use of various types of
intermediaries. These are illustrated in Figure 8.1 and then discussed in the sections
that follow.

Intermediary
Content models
sponsorship Infomediary Brokerage models
intermediary Agent models
Online retailing
Figure 8.1 Types of online channel intermediaries
Content sponsorship intermediary

This type of intermediary is aimed at attracting traffic to the organisation’s website for
advertising, shared information and sometimes sales as well.4 This type of channel is
used together with other traditional channels to create multiple revenue streams for
the organisation. A good example of this is the weather channel (such as Channel
180 on DSTV), which provides national and local coverage and weather forecasts
for cities, and often includes sponsored features from various organisations such as
wildlife organisations.
Infomediary
This term is a combination of the words ‘information’ and ‘intermediary’.5 An
infomediary is a type of website that gathers large amounts of data and acts as an
intermediary between those who want information and those who supply it. Two types
of infomediaries exist. The first is a third-party provider of unbiased information,
such as bidorbuy.co.za, which offers consumers a place to gather information about
specific products but does not promote specific products over others. The second type
of infomediary is one that is not necessarily web-based, but can provide organisations
with consumer information that will help them develop, advertise, market and sell their
products.
Intermediary models
Brokerage model
Under the brokerage model one employs third parties known as brokers who bring
buyers and sellers of products and services together in transactions.6 In order to make
a profit, the broker charges a fee to at least one party involved in the transaction. This
model is broad enough to cover a range of business types and situations, such as online
marketplaces, websites, and even online auctions. One of the best-known examples is
eBay, a very successful online auction platform.

8: Online channels and emerging trends in value chain management 153
Agent model
The agent will represent either the buyer or seller, and will charge the one that is
represented.7 An example of this would be an online real estate company offering a
comprehensive website of properties to buy and rent. According to the agent model,
sellers or lessors will pay a fee for advertising their properties. A South African example
of such an online agent model is Property24.com.
Online retailing
Online organisations sell digital (such as airtime) or tangible (such as clothing) products.
Online retailing is extremely useful to organisations selling consumer products and
services such as car rentals, groceries, stationery, tours and travel packages, and even
sweets. Takealot.com, for example, is one of the largest online stores in South Africa,
offering consumers a secure shopping experience and various payment methods, such
as credit cards, loyalty rewards and even vouchers.
As can be seen from this discussion, online channels in value chain management have
led to many changes and developments in the business environment. In the section that
follows, other emerging trends in value chain management will be discussed.
Emerging trends in value chain management

The value chain is changing all over the world.8 The trends in this changing environment
are illustrated in Figure 8.2 and then discussed in the sections that follow.
Internationalisation
Procurement’s Service chains

bigger role in the more important
value chain
Emerging trends than
in value chain product chains
management
Importance of
Augmented reality
collaboration
Figure 8.2 Emerging trends in value chain management

Internationalisation
While growing in size, organisations such as retailers and manufacturers have actively
looked for new sales potential beyond their national boundaries.9 In particular,
organisations operating in mature markets seek additional growth opportunities
in emerging, fast-growing markets. Internationalisation can take place by opening
new units abroad or through acquisitions. Organisations from emerging and developing
countries are aspiring to become globally competitive to ensure a sustainable competitive
advantage.10 Companies from emerging and developing countries have increasingly
become comparable to global companies, and even larger than, in size, earnings,
profitability, and growth. An example of this is in the mining sector, where Anglo
American, originally from South Africa, competes with a huge global organisation
BHP Billiton.
Service chains more important than product chains

Increasingly customers are demanding more pre- and post-sales customer service
for the goods they buy. Accordingly, organisations that effectively join pre- and post-
sales service value chain activities (such as product knowledge, in-store service and
guarantees) will be more successful than product-centric competitors.
An example of the importance of service in the value chain is underscored by CEO
Tim Cook’s apology to Apple consumers in China for not listening to feedback about
post-sales service. This illustrates the importance of product and service quality over
product quality alone.
Importance of collaboration
Collaboration ensures that value chain participants work together in a smarter way, and
that businesses will be able to benefit from more efficient and effective operations.11 The
benefits of better collaboration in the value chain include the following:12
The longer the collaboration, the lower the costs, as channel members who work
together over time understand each other’s internal processes and develop a
workflow that helps to minimise resources spent.
Word of mouth is developed as trust and collaboration develop over time. Due
to these kinds of relationships, referrals often occur, positively impacting the
businesses in the value chain.
Innovation through long-term collaboration also occurs, as channel members learn
to develop more innovative processes when dealing with one another.
Augmented reality
Augmented reality is a technology that superimposes a computer-generated image on a
user’s view of the real world, thus providing a composite view.13

Augmented reality will provide benefits to the value chain in the following ways:14
Picking optimisation
Warehouse management systems could be improved if each picker in the warehouse
could see a ‘digital picking list’ on a display which calculates the most efficient path
through the warehouse. This would help the person to the correct and closest package.
Facility planning
Here warehouses can be planned in full before even beginning construction. Models
can be used to plan the facility, test its measurements and even experience the layout of
the warehouse.
Freight/container loading
Augmented reality can be used to optimally plan the packing of containers before they
are loaded, ensuring the most cost-effective and efficient way of loading the cargo into
a container.
Dynamic traffic support

Even more efficient than a GPS system, augmented reality traffic support systems make
use of windshield displays to enable drivers to follow the best possible route without
being distracted by having to look at a GPS. The display would show the driver critical
information such as cargo temperature and petrol efficiency.
Procurement’s bigger role in the value chain

Purchasing has become even more important in organisations today due to the increasing
pressure to keep costs down.15 Over and above the role of keeping the prices of products
purchased as low as possible, another emerging role of the purchasing department is to
forge and build relationships with suppliers. A strong purchasing strategy is vital, but
what is even more important is that the purchasing department’s strategies are fully
integrated into the activities of the rest of the value chain.
SUMMARY
In this chapter, we discussed the importance of online channels in value chain management.
We also examined the various types of online intermediaries such as content sponsorship
intermediaries and infomediaries. We concluded the chapter with a look at some of the
emerging trends in value chain management, such as internationalisation, the importance of
collaboration, and augmented reality.

Review questions
1. Explain, with the aid of practical examples, the three types of online channel
intermediaries that could be considered by marketers.
2. Discuss the importance of internationalisation as an emerging trend in value
chain marketing.
3. Highlight reasons why collaboration has become so important in value chain
marketing and its benefits to the organisation.
4. Explain what is meant by the term ‘augmented reality’.
5. Compare the benefits of the following augmented reality systems:
a. picking optimisation
b. facility planning
c. freight loading
d. dynamic traffic support.

CASE STUDY
Bookmark
Introduction
IN 2006, JANE WHEELER had an idea. It was a scary idea because it involved leaving her job,
starting a business with no experience or capital in sight, and selling something that had very
little profit margin to what seemed to be a dwindling target market. Still, it was her dream, and she
rationalised that she only had one life, so she did it: she opened an online bookstore.
What is Bookmark?
Bookmark is an independent online bookstore based in Durban, South Africa. Jane is a personal
bookdealer: she will find any book for you. The offering includes new books sold at competitive
prices, finding out-of-print books for customers, generally superior service, and speedy delivery.
Bookmark was nominated for various small business awards, and Jane herself won an award for
Businessperson of the Month.
If Bookmark were a person, she would be extremely well read (but not a litsnob), independent,
liberal, free-thinking, green, local, approachable, quirky, community-orientated, culturally inclined,
and empowering.
The power of books
Bookmark believes in the power of books. It aims to make reading accessible to all South Africans
and strives to be known as South Africa’s book expert. It hopes to work towards increasing literacy
in South Africa, because it believes that when people read, they are empowered.
Profits with principles
Bookmark believes in using its success for the greater good, and supports Food and Trees for Africa
(FTFA), as well as Project Literacy, by donating a portion of each sale.
Vision statement
Bookmark’s vision is to become the number one brand in South African consumer’s minds when
it comes to buying books.
SWOT analysis
Strengths and weaknesses
Bookmark has the following strengths:
Unsurpassed book-finding ability: There is no other book store in South Africa that can
track down a book like Bookmark can. It has online access to both local and international
bookseller networks, and has been able to find the most rare, unusual, and long-out-of-print
titles imaginable.
Competitive pricing: Bookmark cuts costs where it can so that it can offer the best prices. If a
customer finds a better price, Bookmark will match it. (Online consumers are extremely price
sensitive.)
Superior service: It makes the book-buying process as easy and simple as possible. At any
time, a customer is a few emails and an EFT away from receiving their order.

Expertise within the industry: Bookmark staff know their stuff. They are almost always online,
ready to answer customers’ questions, find books, and make recommendations.
Focus: Bookmark sells only books, unlike like other book stores that sell music, games and
DVDs.
Low monthly expenses: Bookmark employees work from home offices, so they save on office
rent and commuting. They use the most efficient and reasonable courier around.
No debt (started small and grew organically), and therefore minimal risk.
Simple, user-friendly, uncluttered website.
Fast delivery.
Loyal customers: Many of its customers are repeat customers and help to spread the word.
Socially responsible and green: Apart from supporting Food and Trees for Africa and Project
Literacy, Bookmark offsets its carbon footprint by planting trees, reusing packaging, and
recycling everything, including teabags.
Bookmark has the following weaknesses:

Bookselling has a narrow profit margin.
Limited resources (advertising, cash and staff ): Because there is a narrow profit margin,
Bookmark has a limited cash flow. Staff must work harder for less. Bookmark also doesn’t have
a great deal of money to spend on advertising.
Delayed customer satisfaction: Customers have to wait for imported books to arrive (if they
are looking for an international title that Bookmark doesn’t have in stock).
Not yet well known in the marketplace.
No physical store: Some customers love browsing, and Bookmark doesn’t have a physical
bookstore. This also means that it doesn’t benefit from impulse sales.
Threats and opportunities
Bookmark faces the following threats:
The popularity of ebooks and digital ebook reading devices such as Amazon Kindle, Sony
eReader and Apple iPad: Reading devices are wonderful things, full of apps and gadgets that
can add to your reading experience. They are also great to travel with. The ebook market
effectively cuts out the book store: you can buy ebooks directly from your device.
Foreign exchange fluctuations: As Bookmark imports most of its titles, variations in foreign
exchange rates affect costs.
Fuel price escalation: This affects both the import costs and the courier-to-customer costs.
Road congestion, bad weather, strikes: These may affect service delivery.
Bookmark has the following opportunities available to it:

Servicing large corporates: Bookmark would like to become the first choice for corporates
who need to order books in bulk for corporate gifts, workshops, and so on.
Supplying other (non-book) stores: Bookmark already supplies a few stores (baby stores, pop-
up creative stores, erotica shops), and this works well.
Book clubs and events.

Book launches.
Possibility of opening a physical store.
Publishing, especially ebooks and print on demand (POD).
Bookmark’s target market
The target market is non-gender and non-racial specific, aged between 21 and 40. The Living
Standards Measure (Households) income generator puts Bookmark’s customers in the 7–10 range,
but aspiration is encouraged from lower-income groups. A key interest in our market segment is
a common love of books.
Within this segment you find:

discerning book lovers who read quality fiction, including award winners, classics and popular
modern fiction, who are always looking out for the next great read
graphic novel fans frustrated by the lack of titles stocked by other book stores in South Africa
customers who love the idea of books – they are not necessarily voracious readers but
appreciate beautiful books. These books include the categories of art, illustration, graphic
design, photography, architecture, and fashion.
The fringe market includes students, specifically from Unisa and Wits, art directors and designers,
writers, gay and lesbian readers, and readers of erotica. Research suggests that some people are
slightly intimidated by book stores. They don’t want to appear uneducated or as having poor taste.
Bookmark aims to make these people feel good about buying books and reading. Because its
inventory is handpicked, and it makes specific recommendations for its customers, they cannot
make a ‘wrong’ choice in the store.
Major competitors
Competitor ‘A’: The top-of-mind book store in almost every mall
Strengths: Distribution (21 stores); well-established, trusted brand; loyal customer base;
attractive, comfortable stores; good loyalty programme; immediate satisfaction of purchasing
in-store; regular marketing programmes; new online store.
Weaknesses: Occasional uninformed staff; cool and excluding attitude; expensive; lacking in
product breadth and depth.
Competitor ‘B’: The top-of-mind online retailer

Strengths: Friendly brand; market-related prices; trusted, well-known, top-of-mind for online
book sales; marketplace sells second-hand books.
Weaknesses: Occasional poor service; no focus; no loyalty programme; no physical stores for
browsers; delayed satisfaction waiting for product to arrive; cluttered website; constant sales
cheapen the brand.
Competitor ‘C’: The book store (known for magazines and stationery), in almost every mall
Strengths: Competitive pricing; well-established, trusted brand; excellent distribution – lots of stores.
Weaknesses: A bit cheap; very limited stock – only bestsellers; very poor service; uninformed
staff; bland personality.

Competitor ‘D’: The lesser-known online retailer, known for great prices
Strengths: Very competitive pricing; clean, uncluttered, user-friendly website; great service;
extensive list of reliable suppliers.
Weaknesses: No personality; not that well known; no physical stores; delayed satisfaction
waiting for product to arrive.
What sets Bookmark apart from its competitors?

No other book store actively sources books for its customers. Bookmark can find any book for
its customers.
There is no easier way for corporates to order in bulk.

The service is very personal. There is always someone on the other end of the phone or email.
You won’t get an automated mail from Bookmark. Its staff is more knowledgeable about
books and literature and they know their customers by name.
It provides the solution for book lovers who enjoy browsing physical bookstores but find
them too expensive.
Its tone is warm and friendly but at the same time a little subversive.
Bookmark’s sustainable competitive advantage is that it can find any book.
Why is Bookmark succeeding?

The combination of great prices and superior service, combined with its ability to find any book,
make the decision to choose Bookmark an easy one. This is proven by the growing number of loyal
repeat customers it has.
Production plan
Bookmark endeavours to offer service that exceeds consumer expectations. Components of this include:
quick email response times
fast and efficient processing of orders and delivery.
Marketing plan
Marketing objectives
Bookmark’s current marketing objectives are to grow the current consumer base, grow its mailing
list, and focus on large corporates. It also acknowledges the power of word of mouth: at this time,
this is what its success is based on. Bookmark markets itself indirectly through great service.
Developing marketing strategies
Product: Any book, from bestsellers to out-of-print titles
Place: Books to be sold online and delivered via courier
Price: Competitive pricing strategy – Bookmark is more affordable than its well-known
competitors and offers better service than its cheaper counterparts.

Promotion: Monthly mailing list, community bookmark blitz, Facebook group updates, blog,
Twitter.

Marketing budget
Bookmark operates on a very tight (read: virtually non-existent) marketing budget of around
R4 000 per annum.
Marketing action plans
Monthly emailer: This is one of its most powerful tools. Apart from advertising new products
to consumers, it serves as a monthly reminder of the brand. Effort has to be made to keep
the mails fresh, engaging and interesting, and to keep growing the list. The email contains an
eclectic mix of well-written book reviews, including book awards shortlists, bestsellers and
unusual titles. Customers interested in ordering a book off the list, or any other title, simply
reply to the email.
Morningside Bookmark Blitz: The company printed 10 000 bookmarks (in lieu of flyers) and
distributed them in the immediate community. They informed the consumer of free delivery
in Morningside, that schools qualify for a 10 % discount, and that a percentage of each sale
goes to charity. Bookmarks have a longer lifespan than flyers and are relevant to the product.
PR: Bookmark staff are always on the lookout for PR opportunities, including radio interviews,
proactively submitting book reviews, and so on.
Social networking: Bookmark actively promotes products, and reading in general, on its blog,
Facebook page and Twitter. This keeps customers and customers-to-be up to date with book
news, encourages reading in general, and helps to keep Bookmark top of mind in the books
category.
Posters: Advertising agency Lowe Bull conceptualised posters with the strap line ‘Read
Yourself Interesting’. These posters have been displayed at various locations. The artwork
was also distributed online and displayed on Bookmark’s blog and Facebook page. Because
of their originality, the ads have also been posted on various advertising sites and blogs
including Luerzer’s Archive, and were locally named Ad of the Month.
Bookmark’s 8-point growth plan
1. Sell as many books as possible
2. Keep expenses down
3. Grow the customer base, focusing on corporates
4. Keep customers happy
5. Grow Bookmark organically as a brand and business
6. Keep cash flow fluid
7. Invest profit
8. Plant trees, encourage literacy, make the world a better place.
What does the future hold for Bookmark?
Bookmark believes that despite the leaps and bounds that have occurred in entertainment
technology, there will always be a demand for books. Bookmark hopes to remain organic and
flexible enough to continue growing and succeeding in the market.
Source: Based on Niewenhuizen, C & Van Heerden, CH. 2016. Contemporary Retail and Marketing Case
Studies, 2nd ed. Cape Town: Juta.

References
1–2 anesan, S, George, M, Jap, S, Palmatier, RW & Weitz, B. 2009. Supply chain management
G
and retailer performance: emerging trends, issues and implications for research and
practice. Journal of Retailing, 85(1): 84–94: 84.
3 Wiid, JA (ed). 2013. Distribution management. Cape Town: Juta: 167.
4–5 Wiid, op cit, 168.
6 Wiid, op cit, 169.
7 Wiid, op cit, 170.
8 Finne, S & Sivonen, H. 2009. The retail value chain: how to gain competitive advantage
through efficient consumer response (ECR) strategies. Madison: Kogan: 5.
9 Finne & Sivonen, op cit, 11.
10 Cant, MC, Van Heerden, CH & Ngambi, HC. 2013. Marketing management: A South
African perspective, 2nd ed. Cape Town: Juta.
11 Robinson, A. 2016 supply chain trends: 7 of 12 trends that will drive supply chain
management in 2016. https://cerasis.com/2016/01/04/2016-supply-chain-trends/
(Accessed: 27 January 2017).
12 Robinson, op cit.
13 Lifescience.com. nd. www.lifescience.com/34843-augmented-reality.html. (Accessed: 27
January 2017).
14–15 Robinson, op cit.

Index
4 Ps see marketing mix business size 97–98
A C
accumulation 10 case studies
activity-based costing 127 Amarula Cream 85
administration function and quality Chinese clothes 46–47
control 97 online bookstore 157–161
adversarial relationships 121–122 cash-and-carry wholesalers 3
after-sales service see service channel communication 75–76
agents 5–6 problems 145–146
types 72 channel design 65–66
see also intermediaries as part of marketing mix 66
air transport 105 steps 66–71, 67, 68, 69, 70
allocation 10 channel members 10
Amarula Cream case study 85 benefits 13
arbitration 141 choosing 71
assortment 10, 14, 67 factors to consider 73–76
gap 8–9 functions 14
augmented reality 154–155 secrecy 146
availability 68 channels see distribution channels
Chinese clothes case study 46–47
B coercive power 142, 143
barriers 124 collaboration 154
bill settlement 75 collaborative relationships 123–126
brand 43 collection period 75
vs competitive advantage 26 commission agents 72
loyalty 113 commodity products 112
brokers 72 communication 75–76
see also agents conflict 139
bulk-breaking 4, 12, 103 frequency 146
business relationships 118 in the value channel 145–146
conditions impacting on 118–119 competition 75
as partnerships 118 and conflict 135–136
spectrum 118, 120 competitive advantage 26–27, 114–115
types 119–121, 120 strategies 32, 33, 36, 39

competitive pressures 40 and customers types 127–129, 128

conflict 135–141 customisation 67
causes 138–139
channel 135 D
vs competition 135–136 dealerships 71
effect on efficiencies 139–140 decision-making domain conflict 139
and external threats 141 delivery path 51
management 140–141 demand planning 98–99
types 136–137 differentiation 26, 115
consolidation inbound and outbound approaches 33–34
102, 103 costs 36
consumer distribution channels 77–78 excessive 35
content sponsorship 152 optimising 41–42
control 76, 137 product vs value chain 36
corporate philosophy compatibility 18 strategy 33–36
cost strategy sustainability 42
advantage 37–38 digital marketing 51, 53, 157–151
benefit match 111–112 diplomacy 141
efficiency 7, 18 direct distribution 68
reduction 37 disintermediation 135
-to-serve 127–129, 128 distance 75–76
credit 4, 12 distraction 39
CRM see customer relationship distribution 1–2, 101–102
management definition 2–6
cultural distance 75 distribution channels 2
cultural environment/factors 52 communication see channel
customer communication
characteristics 75 consumer vs industrial 69, 76–79
engagement 62 control 75–76, 81
profitability 127–129, 128 decisions 6, 7, 102
satisfaction 7, 127 design see channel design
service see service direct vs indirect 50–51, 68–69
value 24–25 efficiency 139–140, 144
customer expectation 106–107 functions 7–8, 67–68
vs profitability 115 importance 6–7
customer needs 67 intensity 69–71, 70
and value 111–112 leadership 19
customer relationship management 119 level coordination 18
vs customer relationship marketing 125 levels 68

Index 165
manufacturer services 81 financial risk 42

in marketing environment 49–51, 50 focus strategy 39–41
members see channel members franchise conflict 138, 139
modification 83–84 functional marketing role 31
objectives 67 functional risk 42
online 51
role 67 G
selection 79–83 gaps 8–9
in South Africa 51 general management and quality control
types 68–69 95
value-adding 55, 56, 57, 58 geographic gap 1–2, 7, 76
distributors 2, 71 global environment/factors 53
see also wholesalers goal incompatibility 139, 145
downstream differentiation 34 grading 14
E H
economic horizontal conflict 136
environment/factors 52 human resources 20, 28
growth 25 and purchasing 92
ordering quantity 100
economies of scale see cost efficiency I
efficiency 14, 157–158 imitation 34, 35
of exchange 11–12 impact and focus strategy 39
vs flexibility 38 import regulations 53
see also cost efficiency inbound consolidation 102
electronic data interchange 101 inbound logistics 20, 27, 92–94
electronic purchasing 91 indirect distribution 68
environmental issues 52-53 industrial distribution channels 78–79
exchanges 121–122 infomediaries 152
exclusive distribution 71 information 17
expectations conflict 138–139 services 58
expert power 142–143 sharing 18
external environment 51–54, 134 technology 151
innovation 25
F intangible value 113
facilitating function 11, 14 integrative marketing 31–32
finance function 14 intensive distribution 70
and purchasing 92 intermediaries 5–6, 69–71, 70
and quality control 97 activities 10–11

attitudes 81 function 10–11, 14

financial constraints 81 see also inbound; outbound logistics
functions 9–12, 11, 10 lot size 67
logistical vs transactional 10–11 low-cost strategy 36–38
management ability 81
management style 74 M
reputation 74 mail-order wholesalers 3
selecting 80–83 manufacturers 54
types 71–73, 72 agents 72
see also agents margins
international environment/factors 53 and cost-to-serve 127–129, 128
internationalisation 154 vs volume 36–37
internet 151 market
marketing see digital marketing characteristics 79–80
internode transport 105 coverage 74
inventory 17 segments see segmentation
costs 99–100 marketing 28, 89
exchange period 75 distribution channels see distribution
holding 100–101 channels
material planning requirements 100
J relationships 120
jargon 145 research 14
joint planning 18 marketing channels 133
just-in-time inventory 100 behavioural processes 134
communication problems 145–146
K conflict 139–141
key account management 127 structure 134
key factors 116–117 marketing function 30
knowledge gap 8–9 implications of focus strategy 40–41
Kyoto agreement 52 and purchasing 92
and quality control 96
L roles and activities 29–32, 31
language difficulties 145 marketing mix 1, 101
large businesses and quality control and CRM 125
97–98 mediation 141
legitimate power 142, 143 merchandise range 4
lifetime value of clients 127 mixing 103
location 17 multi-channel conflict 137
logistics 12, 20, 58, 68

Index 167
N in the value channel 143

niche markets 39 price 36
hike hedging 100
O sensitivity 128, 157
online stabilisation 7
agents 153 vs value 24
bookstore case study 157–161 primary activities 20, 21, 27–28
brokerage 152 procurement 20, 28
intermediaries 151–152 and cost saving 38
intermediary models 152–153 role in value chain 155
marketing see digital marketing see also purchasing
retailers 153 product
operations 27 customisation see customisation
opportunistic relationships 121–122 differentiation see differentiation
order consolidation 12 information 12, 67
order processing 101 lines 74
organisational infrastructure 20 nature of 80
outbound consolidation 103 production function 17
outbound logistics 20, 27–28 and purchasing 92
outsourcing 124–125 and quality control 96
overpricing 36 productivity 25
ownership gap 8–9 psychological risk 43
purchasing 89–90
P agents 72
perceived value 34, 36, 89, 94, 113 and other functions 92
perception differences 138, 146 and quality control 95–96
perishability 80 tasks and objectives 90–92
physical see also procurement
environment/factors 52–53
risk 42 Q
pipelines 104 quality
point-of-purchase conflict 138 assurance 67
political environment/factors 51–52 management system 98
Porter, Michael 25, 89, 114 performance 94
competitive strategies 32, 33, 36, 39 see also total quality management
positioning 40 quality control 94
postponement 103 and business functions 95–98
power 141 and business size 97–98
bases/types 142–143 quantity gap 8–9

R shelf space 137

rack-jobbers 3, 73 size of businesses 97–98
rail transport 105 small businesses and quality control 97
referent power 142, 143 social distance 75
relationship management see business social risk 42
relationships; customer relationship socio-cultural environment/factors 52
management sorting see assortment
relationship value 43–44 spatial gap 8–9
resources 52–53 spaza shops 51, 60–62
scarcity 138 standardisation 10, 14
retail effectiveness 62 storage 103–104
retailers 2, 3–5, 73 see also warehousing
characteristics 4 store owners and rack-jobbers 73
formal 58–59 strategic marketing role 30
functions 4–5 strategic networking 117
large 58–59 supplier base 18
small see spaza shops supply chain 1, 15–16
vs wholesalers 5 buffering 100–101
reward power 142, 143 supply chain management 15, 18–19
reward sharing 19 decision areas 17
risk sharing 19 and quality management 94–95
risk-bearing 4 vs traditional distribution 18–19
road transport 104–105 supply management 98–99
role conflict 138 supply uncertainties 100
roles in value channel 144 support activities 28–29
sustainable competitive advantage see
S competitive advantage
sales 28 switching costs 35
intermediaries see intermediaries SWOT analysis 157–160
strength 73, 74
seasonality 8 T
see also time gap target market 79–80
secondary activities 20, 21 targeting 39
secrecy 146 technical
segmentation 36, 39, 41–42 development 20
selective distribution 70–71 environment/factors 53
selling agents 72 support 12
service 28, 68, 105–107, 157–158 technological distance 76
quality vs product quality 154 technology 28

Index 169
time gap 8–9, 76 manufacturing 55, 56, 57

time horizon 18 spaza shops 62
time risk 43 wholesalers 58
total quality management 91, 98 value chain/s 1, 19–21, 25, 29, 88
transactional activities 20
function 10, 14 maize 57
relationships 121–122 management trends 153
transport 7, 17, 58 primary vs secondary functions 88–89
inbound 93 rooibos 56
types 104–105 vertical conflict 136–137
truck-jobbers 3
W
U warehousing 17, 58, 102
unique selling proposition 115, 160 functions 102–103
uniqueness 33, 35 private vs public 104
vs value 36 water transport 104
unit value 80 wholesalers 2–3, 5, 58, 71
unprofitable customers 128–129 activities 58
utility 8–9 vs retailers 5
value-adding vs non-value-adding
V activities 58
value 111 see also distributors
for businesses 114
channel see channels
creation 115–117, 116
for customers 111–113
customer’s perceived 24–25
drivers see key factors
equation 112
platform 31
proposition 42–44
signalling 36
as a strategic objective 114–115
systems 26–27
upstream and downstream 26–27
vs price 24
value-adding 54
exchanges/relationships 122–123
large retailers 59–62, 60

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Understanding this value chain is important for companies to stay relevant,

Marketing Value Chain is about understanding this value chain, where

Key concepts are:

Marketing Value Chain is intended for undergraduate and postgraduate

Copyright 2018. Juta and Company [Pty] Ltd.

Marketing Value Chain cvr.indd 1 12/11/2018 15:05

Marketing Value Chain

MVC manuscript--LBC.indb 1 2018/11/14 17:24:10

First published 2018

PO Box 14373, Lansdowne, 7779, Cape Town, South Africa

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ISBN 978 1 4851 2932 5 (Print)

ISBN 978 1 4851 2933 2 (WebPDF)

Project Manager: Willemien Jansen

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About the contributors......................................................................................................................... viii

1: The nature of distribution and its role in the supply chain����������������������������� 1

2: The concept of the value chain and its relation to marketing����������������������24

Competitive advantage and value chain������������������������������������������������������������������������������������26

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3: Marketing distribution channel value-adding activities�������������������������������49

4: Understanding channel design and the selection of channel members���65

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5: Functions of the marketing value chain�����������������������������������������������������������88

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6: Managing business relationships������������������������������������������������������������������� 110

7: Behavioural processes in the value chain������������������������������������������������������ 133

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8: Online channels and emerging trends in value chain management������� 151

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Marketing professionals need to understand the marketing value chain to be competitive.

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After working through this chapter, you should be able to:

To understand the marketing value chain, we must understand where distribution

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Some characteristics of retailers are the following:10

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Display of goods – Retailers display different types of goods in a very systematic

Distinction between a wholesaler and a retailer

Table 1.1: Distinction between a wholesaler and a retailer

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Benefits of using an agent

Disadvantages of using an agent

The importance of distribution channels

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The importance of distribution channels is highlighted by the following:

Functions of a distribution channel

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A discrepancy of quantity and assortment exists because manufacturers produce

Distribution channels perform a number of functions, which will be discussed in the

Distribution channels close gaps and provide utility25

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Form utility Time utility Place utility Possession utility

Figure 1.1: Providing utility and bridging gaps

Channel functions performed by intermediaries

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Source: Lamb, Hair & McDaniel, 2012

We can also divide the functions performed by intermediaries into ‘transactional’

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1: The nature of distribution and its role in the supply chain�� 1

2: The concept of the value chain and its relation to marketing��24

Competitive advantage and value chain��26

3: Marketing distribution channel value-adding activities��49

4: Understanding channel design and the selection of channel members��65

5: Functions of the marketing value chain��88

6: Managing business relationships�� 110

7: Behavioural processes in the value chain�� 133

8: Online channels and emerging trends in value chain management�� 151

38–39 Lamb et al, op cit.