Marketing Topic

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Channel Design Decisions, Management Decisions, Channel Integration and Channel Issues Presented By: Muhammad Waqas Shakir Sharif Shamsa Kanwal Syeda Mahek Mumtaz M.Com (Morning) Session 2010-2012 Submitted To: Sir Zahid Ali 05 42 46 48

Department of Commerce The Islamia University of Bahawalpur

Contents
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 What is Marketing Channel?  Importance of Marketing Channel o Value created by intermediaries o Functions performed o Consumer benefits from intermediaries  Channel design decisions o Specify role of distribution  Channel objectives o Select type of channel o Market Coverage o Satisfying buyer requirements o profitability  Channel management decisions o Selecting channel members o Motivating channel members o Evaluating channel members  Channel integration o Horizontal marketing system  Horizontal integration o Vertical marketing system     Vertical integration Corporate system Administered system Contractual system 2 .

• • •  Issues Wholesaler sponsored voluntary chain Retailer cooperative Franchise o Channel conflicts      Bypassing channels Over saturating markets Creating too many links Providing inadequate support Behaving inconsistently o Channel cooperation o Competition o Channel leader ship   Channel captains Slotting allowance o Channel power     Reward Expert Legitimate Coercive 3 .

Risk taking Logistical. Sorting.What is Marketing Channel? “A system design to move goods and services from producers to consumers.i-e Buying. transporting Facilitating. and the payments generated by them that flow in the opposite direction (from consumer to the vendor). A company wants a distribution channel that not only meets customer’s need but also provide an edge on competition. Following decisions are involved in -design a marketing channel 4 . Selling. equipment.i-e Assorting. Information Consumer benefits from intermediaries They get the product where they want Channel design decisions Similar firms often have dissimilar channels of distribution.i-e financing . which consist of people and organizations. and information resources. supported by various facilities.” Importance of Channel Value created by intermediaries They make selling and buying goods and services more efficient Functions performed • • • Traditional.” “A path through which goods and services flow in one direction (from vendor to the consumer).

II. firms closely observe what other firm from their home market are doing in those markets. marketing objectives are reviewed. III. 5 . When economic conditions are not good. such as custom built machinery are sold directly by company sales representative.Specify role of distribution A channel strategy should be designed within the context of whole marketing mix. the producers want to move their products through shorter channels and without services that add to the final price of goods. Perishable products require more direct marketing. Under competitive conditions. in entering new markets. price and promotion are specified. require channels that minimize the shipping distance the amount of handling. Marketers should adopt channel objectives to larger environment. channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs. Each element may have a distinct role or two element may share an assignment Channel objectives Marketers should state their channel objective in terms of targeted service output levels. Channels objectives vary with product characteristics. For example. Next. A number of factors affect channel objectives. Nonstandard products. I. the role assigned to product. like building materials. First. Bulky products.

only one outlet in a geographical area Selective distribution. some interest of buyers should be fulfilled. When choosing a marketing channels and intermediaries. variety 4. information 2. some outlet in one area more common Satisfying Buyer Requirements Second consideration. which type of middlemen. attendant service 6 . • Which channel and intermediaries will provide best coverage of target market? • Which channel and intermediaries will best satisfy buying requirement of the target market? • Which channel and intermediaries will be most profitable? Market coverage For achieving best coverage three degrees of distribution diversity exist. Intensive distribution. These falls into four categories 1. the most suitable type of channel for the company’s product must be determined • • The firm needs to decide whether middlemen will be used in its channel And if so. Marketing executives consider three questions. convenience 3.Select type of channel When the distribution role in marketing program has been agreed on. as many outlets as possible Exclusive distribution.

These costs include distribution. On the other hand. For example appliances that require delivery. 7 . Through displays demonstrations and personal selling. Variety. some producers have to work very hard to line up enough qualified intermediaries. Some producers face no difficulty in signing up channel members. advertising. distance of outlet may be considered as convenience. Channel cost is critical dimension of profitability. Channel Management decisions Once the firm has decided the best channel design. for each channel member and channel as a whole. interest in having numerous competing items which to choose. Selecting Channel Members Manufacturers vary in their ability to attract qualified marketing intermediaries. selling expenses associated with different types of marketing channels. Convenience has multiple aspects/dimensions. it must implement and manage that chosen channel. Channel management involves selecting. The extent to which channel members share these costs determines the margins received by each member and by channel as a whole. which is determined by margins earned.Information is important when buyer has limited knowledge. Marketers do provide these services to their prospective customers Profitability The third consideration in designing a channel is profitability. And for others. Properly choose intermediations communication with the buyers. time consumed may be important in this regard. Attendant services are important requirement. Marketers can satisfy these requirements intelligently. managing and motivating individual channel member and evaluating their performance over time. installation and credit. For instance.

Like the firms use customer relationship management software systems to manage relationship with custo0mers. customers and future growth potential. size. the firm must decide what factors differentiate better ones. in the same way firms can now use PRM and supply chain management (SCM) systems to organize. like Procter & Gamble. manage. the firm and the partners. and evaluate relationships with intermediaries. They practice strong partner relationship management to build long term relationship with their partners. the firm may consider store’s location.When selecting intermediaries. motivate. In this regard the firms can work jointly with the intermediaries to plan goals and strategies. intermediaries are their first line customers and partners. inventory levels and advertising plans etc. they must be continuously managed and also motivated. The firm may consider the followings Number of years in business Other lines already carrying Growth record Profit record Cooperativeness and reputation If the intermediaries are sales agent. Many firms are now using high tech partner relationship management (PRM) to coordinate their whole channel marketing effort. Managing and Motivating Channel Members When the channel members are selected. and quality of sales force If intermediary is a retailer who want exclusive or selective distribution. This creates a marketing system that meets the needs of both. the firm may take into consideration. 8 . For many firms. In managing a channel the firm must convince distributors intermediaries) that they can succeed better by working together. other lines carried.

In contrast. For example. treatment of damaged goods and goods lost and so on. are controlled to varying degrees. Horizontal marketing system “HMS is that when two or more businesses which are otherwise unrelated. Integrated systems. Conventional channels also tend to be unstable. and members are united by common goals and. Channel integration In order to make marketing channels more efficient and effective. The standers may be sales. Those who are not performing well should be assisted or as a last resort. The company should also recognize and reward those intermediaries who are performing well. put together their effort to exploit an emerging marketing opportunity” 9 . This section compares horizontal and vertical integration. quotas. and it explores several common types of vertically integrated channels. members in a channel system can decide who will take care of warehousing. producers and intermediaries frequently join together to build integrated channel systems. so they feel free to enter or exit the system if it suits their individual business objectives. conventional channels have little or no structure and less coordination among intermediaries. average inventory levels. replaced. in some cases. two ways system can be built. legal contracts. members aren’t united by common goals. Any coordination that is achieved usually happens through negotiation or bargaining. and financing in ways that benefit all the members of the channel. on the other hand. promotion. the producer must be sensitive to their dealers. Lastly.Evaluating Channel Members The producer must also cheek each channel member performance against standards regularly. Those who treat their dealers poorly have risk of losing them and they may face some legal problems too.

This process is called Vertical Integration. one company owns the entire chain. and retailers in the production and distribution of products.” There are three types of vertical marketing systems.Joining of two or more corporations on the same level for the purposes of pursuing a new marketing opportunity. from producing goods and services all the way to selling them to final customers. a book publisher might acquire another publishing house to increase its stable of editors and authors or to otherwise enhance its competitiveness. The two products are marketed together. allowing the two companies to combine their marketing resources and accomplish much more than either one might accomplish alone. which are discussed as under Corporate Systems In some marketing systems. Vertical marketing system A Vertical Marketing System (VMS) combines different types of intermediaries to form a cohesive chain from the producer to the last intermediary. Such an 10 . joining producers. Expansion via acquisition of a competitor or by adding outlets to a chain. Products from each member can be marketed and/or distributed together. such as a bottle manufacturer combining with a producer of dehydrated salad dressing preparations. Horizontal Integration The integration of intermediaries in one level of marketing process. wholesalers. For example. the result of vertical integration is called a vertical marketing system. Vertical Integration “The process of developing marketing system that intermediaries both the source of production and the distribution capacities. Usually a horizontal marketing system is established so that the individual members can combine resources to make the most out of the marketing situation. In other words.

Retailer cooperative “A voluntary contractual marketing system led by a group of retailers” A second voluntary group is the Retailer Cooperative.arrangement is called a Corporate Marketing System because all the elements in the channel are under the control of one corporation. but mot the exclusive ownership of one corporation.” The second type of VMS features a dominant company. but they do not have the controlling ownership of corporate system. In the Administered Marketing one company dominates by coordinating activities in the channel. 11 . lead the group. rather than wholesalers. Wholesaler-sponsored voluntary chain “A type of contractual marketing system that is led by one or more wholesalers” In wholesaler-sponsored voluntary chain. Administered Systems “A type of VMS in which one player has control by way of influence and agreement but not through explicit ownership or contractual arrangement.The retailer’s benefit by getting promotions and purchasing power on a larger scale then any one of them could achieve alone. one or more wholesalers pull together a group of independent retailer . in which the retailers. Contractual Systems “A VMS in which contracts explicitly spell out the roles and responsibilities of all members in the channel” The third major type of VMS fails between the other two in terms of control and coordination. Contractual Marketing System has formalized working relationships not found in administered systems.

As a first step. Second everyone in the channel needs to build solid working partnerships that are sensitive to the needs of each member. system wide advertising. but nearly all feature continuous field service and support. Issues Channel Cooperation Because they are collections of separate. This includes developing effective communication systems.Franchise “A business entity licensed to use the trademarks. There are a number of franchising methods. If members of a channel need each other in order to survive and succeed. these partnerships need to be continually nurtured and managed over time Channel Conflict Channel conflict can occur in any number of situations. and sometimes independent. operations and other attributes of a business” The third contractual VMS to consider is Franchise. clearly signaling confidence in partners. along with suggested ways to minimize the problems they cause: 12 . marketing channels rely on cooperation from all members in order to function efficiently. and centralized purchasing and record keeping. manufacturers must understand the needs and expectations of the wholesalers. retailers. Here are several common sources of channel conflict. and distributors responsible for moving products on to final customers. people and organizations. they should work toward common goals and provide each other with adequate support. but the problem is usually rooted in one channel member placing its own success above the success of the entire channel. and responding positively to marketing crises. Third.

Bypassing should be done only if the existing intermediaries agree with the reasons and give their approval. resulting in complexity and profit margins squeezes for intermediaries.Bypassing channels If a producer bypasses existing channels in the hope of increasing business. the dominant member in the channel can try to guide some intermediaries into market areas that don’t overlap with other intermediaries. Alternatively. or managerial assistance. of dealers or retailers and then stick to those limits. Over saturating markets To avoid over saturating markets. channel members should set guidelines on the size and ad no. conflict is inevitable. If intermediaries are not properly supported. they won’t be content and they won’t be as effective as they might be. Providing inadequate support In return for distributing a manufacturer’s product. intermediaries expect a certain level of support. 13 . which is making a product available through too many intermediaries in a given market. Behaving inconsistently Erratic behavior is likely to disrupt life for everybody in the channel. Creating too many links It’s possible for a channel to develop too many links. The best way to avoid this is to establish clear guideline and policies and make sure that discipline is maintained. the dominant channel member should make sure that buying and selling relationships are clearly defined and mutually acceptable to all intermediaries. they should be executed with the clear understanding and support of channel partners. training. When changes are necessary. This support might include advertising. If the number of intermediaries can’t be reduced.

The rising power of retailers has at the expense of both wholesalers and manufacturers. access to customers. the leadership depends on the type of arrangement. such as product supply. Slotting allowance It is the extreme case of retailer power is Slotting allowance. 14 . the channel captain is one part of the overall company. it must have some level of dependence on the captain. In a corporate system. or financial support. Channel Power “The ability of the channel captain to influence or control the behavior of the rest of the channel” For a member to concede power to the captain. One company or one group of companies needs to have a leadership role to make sure the systems activities are coordinated. Channel Captains “The dominant player in a given marketing channel who has power over other channel members” In a corporate VMS. the captain is the domain player whose influence guides the actions of the other members. which is an outright payment from the manufacturer or wholesaler in return for shelf space in retail outlets. Here are some types of channel power. But with the passage of time the power of manufacturers and wholesalers has reduced and retailers have become more powerful. And in a contractual system.Channel Leadership Another crucial issue in marketing channels is channel leadership.

this is considered reward power.Reward When captain is in a position to reward members for desired actions. Expert In some cases retailer grant power to wholesaler in return for expertise. Legitimate Legitimate power exists when one member believes that the Capitan really does have the authority to control. Coercive The one type of power that might be considered negative is coercive power. 15 . which exists when the captain has the economic power to force other members to compliance.

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