THE ENVIRONMENT

OF MARKETING
CHANNELS
Chapter 2
 Chapter 2 Outline
 The Marketing Channel and the
Environment
 The Economic Environment
 The Competitive Environment
 The Sociocultural Environment
 The Technological Environment
 The Legal Environment
 The Marketing Channel and the
Environment

 The environment where marketing

channels exist is made up of external
uncontrollable factors.
 The five general environments are:
 1. The economic environment
 2. The competitive environment
 3. The sociocultural environment
 4. The technological environment
 5. The legal environment
 The Marketing Channel and the
Environment

 The channel manager needs to understand the

environmental factors that affect marketing channel
systems.
 The marketing channel includes independent
companies such as retailers and wholesalers and
therefore the channel manager must be concerned
with the impact of the environment on these channel
members.
 Furthermore, because the channel effectiveness is
affected by the performance of nonmember participants
(facilitating agencies), the channel manager need to
take into account how the environment affects
nonmember participants.
 The Marketing Channel and the
Environment

 Channel managers need to analyze the

impact of the environment not only on
their own companies and the target
markets, but also on the participants in
the marketing channel.
 This is a key difference between channel
management and the management of
the other variables in a company’s
marketing mix (product, price, and
promotion).
Q:
 For the channel manager, the external environments can
be ranked, from most important to least important, as:
 a. Economic, competitive, sociocultural, technological,
legal.
 b. Legal, competitive, technological, economic,
sociocultural.
 c. Economic, legal, competitive, technological,
sociocultural.
 d. There is no single sequence for all industries at all times.
 e. All are equally important.

 ANS:D
 The Economic Environment
 The channel manager must be aware of
the influence of economic variables on
the participants in the channels of
distribution.
 The following are the major
economic variables that affect
participants in the marketing
channel:
 1. Recession
 2. Inflation
The Economic Environment
 1. Recession: A period of general economic
decline; typically defined as a decline in the
Gross Domestic Product (GDP) for two or more
consecutive quarters.
 A period in which the GDP is stagnant or
increasing slowly is referred to as
“recessionary” or an “economic slowdown”.
 All members of the marketing channel feel the
effects of a recession because sales volumes
levels and profitability fall significantly during
recessions.
Q:
 To deal with inflation and recession, channel
managers should do all of the following except:
 a. Take responsibility for helping intermediaries
weather the situation.
 b. Have contingency plans prepared to implement
when economic conditions warrant.
 c. Increase spending on advertising.
 d. Use special trade promotions.
 e. Increase production and inventory.

 ANS:E
 Discussion Question
 Give an example of how members of the
channel (Producers, manufacturer,
wholesalers, and retailers) can give their
customers more value during recessions
and recessionary periods.
The Economic Environment
 During recession periods, consumer
spending (especially for such durable
goods as automobiles, major
appliances, and computers which
consumers can postpone purchasing)
slows down, sometimes drastically.
 All channel members need to focus on
delivering more value to price-sensitive
consumers during recessions and
recessionary periods.
Q:
 As consumer spending slows down in
recessionary periods, marketing channels for
__________ usually feel the impact earliest.
 a. consumer packaged goods
 b. consumer durable goods
 c. health services
 d. tobacco and alcohol products
 e. None of the above.

 ANS:B
The Economic Environment
 2. Inflation: Is defined as a sustained
increase in the general level of prices
for goods and services.
 The reactions of channel members at
the wholesale and retail levels to high
rates of inflation depends on the
reaction of consumers.
 The problem is that consumer reactions
during inflationary periods are not easy
to guess.
The Economic Environment
 Consumer may follow a “buy now
before prices go higher” psychology
which will increase inflation further.
 Or consumers can follow a “hold on to
your money” psychology which can
lead to a recession.
The Economic Environment
 For channel managers in the producing and
manufacturing firms, shifts in consumer buying
behavior during inflationary periods is viewed in
terms of how it will affect channel member
behavior and what the implication might be for
channel strategy.
 For example: In the face of slower consumer
spending, retailers will be come more careful about
what products they will handle.
 Retailers may also ask for more special price deals
from manufacturers and a higher level of
promotional support.
Causes of inflation
 1. Demand pull inflation
 If the economy is at or close to full
employment, then an increase in AD
leads to an increase in the price level. As
firms reach full capacity, they respond
by putting up prices leading to inflation.
Also, near full employment with labor
shortages, workers can get higher wages
which increases their spending power.
 The Competitive
Environment
 Channel manager must consider the
major types of competition that can
affect channel strategy.
 The following are three major types
of competition that may affect
channel strategy:
 1. Horizontal competition
 2. Intertype competition
 3. Vertical competition
 The Competitive
Environment
 1. Horizontal competition is competition
between firms of the same type.
 For example: automobile manufacturer versus
automobile manufacturer, supermarket versus
another supermarket.
 The competition between consumer electronics
retailers Best Buy and Circuit city is an example
of horizontal competition.
 Both of these retailers sold similar products and
operated “big box” retail stores that emphasized
high sales volumes and low prices.
 The Competitive
Environment
 2. Intertype competition is between
different types of companies at the
same channel level, such as the off-
price store versus the department store.
 It can also be an online retailer
competing against a traditional land-
based retailer.
 The competitive battle between online
giant Amazon.com and the world’s
largest land-based retailer, Walmart is
example of intertype competition.
 The Competitive
Environment
 3. Vertical competition refers to
competition between channel members
at different levels in the channel, such
as retailer versus wholesaler, wholesaler
versus manufacturer or manufacturer
versus retailer.
 Competition between manufacturers of
national brands versus private brands
produced by retailers is an example of
vertical competition.
 The Sociocultural
Environment
 Some important sociocultural factors
that have emerged and affected how
marketing channels are designed and
managed all over the world are:
 1. Globalization
 2. Consumer mobility and
connectedness
 3. Social networking
 4. The Green Movement
 Class Exercise
 Safeway, Carrefour, Smart Buy and other giant
retailers are strong competitors who are often
accused of driving small retailers out of
business.
 Many experts believe that small retailers can’t
compete with the giant retailers and will
eventually go out of business.
 Do you agree with the experts? Are the giant
retailers really the reason that small retailers
go out of business or are there other reasons?
Explain your answer.
 The Sociocultural
Environment
 1. Globalization: This term is used to
describe the interconnectedness and
interdependencies of countries around
the world.
 Globalization refers to the integration of
economics and societies all over the
world.
 The concept of globalization has a
sociocultural component that goes
beyond the physical flows of products
and people across borders.
 The Sociocultural
Environment
 Globalization can also be viewed as a
frame-of-mind or outlook that is held
by millions of consumers from all over
the world.
 Consumers increasingly expect to have
access to world-class products and
services at the favorable prices global
competition is supposed to promote.
 Such expectations is not limited to only
consumers in the richest and most
advanced countries.
 The Sociocultural
Environment
 The message of globalization for the
channel manager is: Globalization has
created world-class customer
expectations that need to be satisfied
through world-class channel strategy,
design, and management.
 The Sociocultural
Environment
 2. Mobility and connectedness: Today’s
highly mobile generation expects not only to
cover a great deal of territory on a regular
basis, but also be completely in touch with
colleagues, friends, and family in the process.
 Buying products and services while moving
around has become a common expectation for
consumers with laptops and smartphones all
over the world.
 This trend is referred to as “mobile
commerce” or m-commerce.
 The Sociocultural
Environment
 Even though, M-commerce accounts for a small
fraction of total retail sales, it is expected to
grow rapidly and become an important channel
of distribution in the near future.
 M-commerce has the following implications
for channel strategy:
 A) Channel managers will need to include m-
commerce in their channel mixes because highly
mobile and connected consumers expect to have
such channels available to them.
 The Sociocultural
Environment
 B) Channel managers will need to
determine the role that m-commerce
channels will play in the multi-channel mix.
 Even though the m-commerce channel is
an important and growing one, it is not
likely to replace retail store channels and
catalog and mail order channels.
 C) Channel managers will need to study
closely the potential and limitation of m-
commerce channels.
 Class Exercise
 What are some limitations of m-
commerce (Mobile commerce).
 The Sociocultural
Environment
 3. Social networking: The term refers to
interaction in networks made up of individuals or
organizations that are linked together based on
some type of common interest such as
friendship, beliefs, hobbies, and professional
interests.
 Social networks increased with the introduction
of the Internet, which allows social networks and
participants in such networks to increase to
millions, even hundred of millions of people.
 The largest of these networks online is Facebook.
 The Sociocultural
Environment
 From a marketing channels point of view, social
networking has:
 1. Empowered consumers to make much more informed
decisions about products they buy
 2. Enabled consumers to make better channel choices
and made them more demanding about the channels
the choose. How?
 Social networking allows consumers to share their
experience about channel choices.
 The information shared on social networks is considered
more reliable because most of the information exchanges
are from peer-to-peer (consumer-to-consumer)
 The Sociocultural
Environment
 4. The Green Movement: This term is often
used to refer to a focus on preserving the
environment and human health.
 All members of marketing channels, including
producers, wholesalers, retailers, consumers,
engage in activities that affect the environment
and quality of life.
 Walmart for example, estimated that is could
save 3800 trees and 1,000 barrel of oil by
reducing unnecessary packing of just one
product category.
 The Technological
Environment
 Technology is the most continuously
and quickly changing part of the
environment.
 The following are some
technological advancement that
have affected channel strategy:
 1. Electronic Data Interchange
 2. Cloud Computing
 The Technological
Environment
 1. Electronic Data Interchange (EDI)
refers to the linking together of channel
member information systems to provide
quick responses to communications
between channel members.
 For example: A retailer computerized
inventory management system is
connected with and monitored by the
supplier’s (manufacturer's or
wholesaler’s) computer.
 The Technological
Environment
 2. Cloud computing is an Internet-based
technology that allows both large and small
businesses and organizations to use highly
sophisticated computer applications without having
their own hardware, software, office computing
space and staff.
 Instead, by being part of the network, or “cloud”
the user can access the computer capabilities need
on demand from a third-part provider via the
Internet.
 By participating in the cloud, the customer pays
only for the computing services actually used.
 The Legal Environment
 The following are some legal issues
in channel management:
 1. Exclusive dealing: An exclusive
dealing arrangement exists when a
supplier requires its channel members
to sell only its products or to not to sell
products from direct competitors.
 Exclusive dealing arrangement are in
violation of antitrust laws if their
effect is to reduce competition or foster
monopolies.
 The Legal Environment
 2. Price discrimination refers to the
practice whereby a supplier, either
directly or indirectly, sells at different
prices to the same class of channel
members to the extent that such price
differences tend to reduce
competition.
 For example: A book publisher gives
giant retailers secret discounts and
promotional deals and does not do the
same for smaller bookstores.
 The Legal Environment
 3. Resale restrictions: When a manufacturer
tries to specify to whom channel members may
resell the manufacturer's products and in what
specific geographic market areas, they maybe
engaging in the practice of resale restrictions.
 The advantages to a manufacturer of resale
restrictions are:
 1. It allows manufacturers to keep certain accounts
as house accounts (customers to whom the
manufacturer sells directly) by not allowing
channel members from selling to those customers.
 The Legal Environment
 2. It enables manufacturers to control
the kinds of outlets from which final
customers will buy.
 For example: If the manufacturer that
uses wholesalers wants only high-service
retailers to sell its products, the
manufacturer could specify the types of
retailers to whom the wholesalers are
allowed to sell to.
 The Legal Environment
 In deciding if such restrictions are an
illegal form of trade, courts use the rule
of reason.
 Under this rule, the courts consider the
intention of the supplier and the effects
of the supplier’s resale restrictions on
the market.
 If the restrictions were not intended
and did not appear to result in a
restraint of trade, they were generally
allowed to stand.
 Class Exercise
 Which of the three legal issues discussed
in the chapter (Exclusive dealing,
Price discrimination, and Resale
Restriction) is the most serious in the
management of the marketing channel?
Explain your answer.
 Reference
 Bert Rosenbloom (2016) Marketing
Channels, 8th Edition, Cengage
Learning, International Edition.