Marketing Topic:

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

 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

What is Marketing Channel?

A system design to move goods and services from producers to consumers, which consist of people and organizations, supported by various facilities, equipment, and information resources. A path through which goods and services flow in one direction (from vendor to the consumer), and the payments generated by them that flow in the opposite direction (from consumer to the vendor).

Importance of Channel
Value created by intermediaries
They make selling and buying goods and services more efficient

Functions performed
Traditional- i-e Buying, Selling, Risk taking Logistical- i-e Assorting, Sorting, transporting Facilitating- i-e financing , Information

Consumer benefits from intermediaries

They get the product where they want

Channel design decisions

Similar firms often have dissimilar channels of distribution. A company wants a distribution channel that not only meets customers need but also provide an edge on competition. Following decisions are involved in -design a marketing channel

Specify role of distribution

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

Select type of channel

When the distribution role in marketing program has been agreed on, the most suitable type of channel for the companys product must be determined The firm needs to decide whether middlemen will be used in its channel And if so, which type of middlemen.

Marketing executives consider three questions. When choosing a marketing channels and intermediaries. 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; as many outlets as possible Exclusive distribution; only one outlet in a geographical area Selective distribution; some outlet in one area more common

Satisfying Buyer Requirements

Second consideration, some interest of buyers should be fulfilled. These falls into four categories

1. information 2. convenience 3. variety 4. attendant service

Information is important when buyer has limited knowledge. Properly choose intermediations communication with the buyers. Through displays demonstrations and personal selling. Convenience has multiple aspects/dimensions. For instance, distance of outlet may be considered as convenience. And for others, time consumed may be important in this regard. Marketers can satisfy these requirements intelligently. Variety, interest in having numerous competing items which to choose. Attendant services are important requirement. For example appliances that require delivery, installation and credit. Marketers do provide these services to their prospective customers

Profitability
The third consideration in designing a channel is profitability, which is determined by margins earned, for each channel member and channel as a whole. Channel cost is critical dimension of profitability. These costs include distribution, advertising, selling expenses associated with different types of marketing channels. The extent to which channel members share these costs determines the margins received by each member and by channel as a whole.

Channel Management decisions

Once the firm has decided the best channel design, it must implement and manage that chosen channel. Channel management involves selecting, managing and motivating individual channel member and evaluating their performance over time.

Selecting Channel Members

Manufacturers vary in their ability to attract qualified marketing intermediaries. Some producers face no difficulty in signing up channel members. On the other hand, some producers have to work very hard to line up enough qualified intermediaries. 7

When selecting intermediaries, the firm must decide what factors differentiate better ones. 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, the firm may take into consideration; other lines carried, size, and quality of sales force If intermediary is a retailer who want exclusive or selective distribution, the firm may consider stores location, customers and future growth potential.

Managing and Motivating Channel Members

When the channel members are selected, they must be continuously managed and also motivated. For many firms, intermediaries are their first line customers and partners. They practice strong partner relationship management to build long term relationship with their partners. This creates a marketing system that meets the needs of both, the firm and the partners. In managing a channel the firm must convince distributors intermediaries) that they can succeed better by working together. In this regard the firms can work jointly with the intermediaries to plan goals and strategies, inventory levels and advertising plans etc. like Procter & Gamble. Many firms are now using high tech partner relationship management (PRM) to coordinate their whole channel marketing effort. Like the firms use customer relationship management software systems to manage relationship with custo0mers, in the same way firms can now use PRM and supply chain management (SCM) systems to organize, manage, motivate, and evaluate relationships with intermediaries.

Evaluating Channel Members

The producer must also cheek each channel member performance against standards regularly. The standers may be sales, quotas, average inventory levels, treatment of damaged goods and goods lost and so on. The company should also recognize and reward those intermediaries who are performing well. Those who are not performing well should be assisted or as a last resort, replaced. Lastly, the producer must be sensitive to their dealers. Those who treat their dealers poorly have risk of losing them and they may face some legal problems too.

Channel integration
In order to make marketing channels more efficient and effective, producers and intermediaries frequently join together to build integrated channel systems. For example, members in a channel system can decide who will take care of warehousing, promotion, and financing in ways that benefit all the members of the channel. In contrast, conventional channels have little or no structure and less coordination among intermediaries. Any coordination that is achieved usually happens through negotiation or bargaining. Conventional channels also tend to be unstable; members arent united by common goals, so they feel free to enter or exit the system if it suits their individual business objectives. Integrated systems, on the other hand, are controlled to varying degrees, and members are united by common goals and, in some cases, legal contracts. This section compares horizontal and vertical integration, two ways system can be built, and it explores several common types of vertically integrated channels.

Horizontal marketing system

HMS is that when two or more businesses which are otherwise unrelated, put together their effort to exploit an emerging marketing opportunity

Joining of two or more corporations on the same level for the purposes of pursuing a new marketing opportunity. Usually a horizontal marketing system is established so that the individual members can combine resources to make the most out of the marketing situation. 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. 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.

Horizontal Integration
The integration of intermediaries in one level of marketing process. Expansion via acquisition of a competitor or by adding outlets to a chain. For example, a book publisher might acquire another publishing house to increase its stable of editors and authors or to otherwise enhance its competitiveness.

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. This process is called Vertical Integration. In other words, joining producers, wholesalers, and retailers in the production and distribution of products.

Vertical Integration
The process of developing marketing system that intermediaries both the source of production and the distribution capacities; the result of vertical integration is called a vertical marketing system. There are three types of vertical marketing systems, which are discussed as under

Corporate Systems
In some marketing systems, one company owns the entire chain, from producing goods and services all the way to selling them to final customers. Such an

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arrangement is called a Corporate Marketing System because all the elements in the channel are under the control of one corporation.

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 second type of VMS features a dominant company, but mot the exclusive ownership of one corporation. In the Administered Marketing one company dominates by coordinating activities in the channel.

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, but they do not have the controlling ownership of corporate system.

Wholesaler-sponsored voluntary chain

A type of contractual marketing system that is led by one or more wholesalers In wholesaler-sponsored voluntary chain, one or more wholesalers pull together a group of independent retailer .The retailers benefit by getting promotions and purchasing power on a larger scale then any one of them could achieve alone.

Retailer cooperative
A voluntary contractual marketing system led by a group of retailers A second voluntary group is the Retailer Cooperative, in which the retailers, rather than wholesalers, lead the group.

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Franchise
A business entity licensed to use the trademarks, operations and other attributes of a business The third contractual VMS to consider is Franchise. There are a number of franchising methods, but nearly all feature continuous field service and support, system wide advertising, and centralized purchasing and record keeping.

Issues
Channel Cooperation
Because they are collections of separate, and sometimes independent, people and organizations, marketing channels rely on cooperation from all members in order to function efficiently. If members of a channel need each other in order to survive and succeed, they should work toward common goals and provide each other with adequate support. As a first step, manufacturers must understand the needs and expectations of the wholesalers, retailers, and distributors responsible for moving products on to final customers. Second everyone in the channel needs to build solid working partnerships that are sensitive to the needs of each member. This includes developing effective communication systems, clearly signaling confidence in partners, and responding positively to marketing crises. Third, these partnerships need to be continually nurtured and managed over time

Channel Conflict

Channel conflict can occur in any number of situations, but the problem is usually rooted in one channel member placing its own success above the success of the entire channel. Here are several common sources of channel conflict, along with suggested ways to minimize the problems they cause:

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Bypassing channels
If a producer bypasses existing channels in the hope of increasing business, conflict is inevitable. Bypassing should be done only if the existing intermediaries agree with the reasons and give their approval.

Over saturating markets

To avoid over saturating markets, which is making a product available through too many intermediaries in a given market, channel members should set guidelines on the size and ad no. of dealers or retailers and then stick to those limits. Alternatively, the dominant member in the channel can try to guide some intermediaries into market areas that dont overlap with other intermediaries.

Creating too many links

Its possible for a channel to develop too many links, resulting in complexity and profit margins squeezes for intermediaries. If the number of intermediaries cant be reduced, the dominant channel member should make sure that buying and selling relationships are clearly defined and mutually acceptable to all intermediaries.

Providing inadequate support

In return for distributing a manufacturers product, intermediaries expect a certain level of support. This support might include advertising, training, or managerial assistance. If intermediaries are not properly supported, they wont be content and they wont be as effective as they might be.

Behaving inconsistently
Erratic behavior is likely to disrupt life for everybody in the channel. The best way to avoid this is to establish clear guideline and policies and make sure that discipline is maintained. When changes are necessary, they should be executed with the clear understanding and support of channel partners.

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Channel Leadership
Another crucial issue in marketing channels is channel leadership. 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 channel captain is one part of the overall company. In a corporate system, the captain is the domain player whose influence guides the actions of the other members. And in a contractual system, the leadership depends on the type of arrangement. But with the passage of time the power of manufacturers and wholesalers has reduced and retailers have become more powerful. The rising power of retailers has at the expense of both wholesalers and manufacturers.

Slotting allowance
It is the extreme case of retailer power is Slotting allowance, which is an outright payment from the manufacturer or wholesaler in return for shelf space in retail outlets.

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, it must have some level of dependence on the captain, such as product supply, access to customers, or financial support. Here are some types of channel power.

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Reward
When captain is in a position to reward members for desired actions, this is considered reward power.

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, which exists when the captain has the economic power to force other members to compliance.

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