Why Do Multifirm Marketing Channels

Exist?
Middlemen often perform the needed
functions at a lower cost than either the
customer or the manufacturer could by
themselves.
The first step in designing a distribution
channel for a given product is to
determine what objectives the channel
must accomplish and their relative
importance.

Designing Distribution Channels: What are

the Objectives to be Accomplished?
Objectives of distribution channels:
Increase the availability of the good or service
to potential customers.
Satisfy customer requirements by providing
high levels of service.
Ensure promotional effort.
Obtain timely and detailed market information.
Increase cost- effectiveness.
Maintain flexibility.

Designing Distribution Channels: What are

the Objectives to be Accomplished?
Product availability
The most important objective for a channel.
For consumer goods, two aspects of
availability must be considered.
Attain the desired level of coverage in terms of
appropriate retail outlets.
The items positioning within the store

Designing Distribution Channels: What are

the Objectives to be Accomplished?
Meeting customers service requirements
Crucial objective for analyzer and defender
businesses attempting to differentiate
themselves on service dimensions.
Some the service requirements include:

Order cycle time

Dependability
Communication between buyer and seller
Convenience
Postsale services

Designing Distribution Channels: What are

the Objectives to be Accomplished?
Promotional effort
Obtain promotional support from channel
members for the firms product.

Market information
Middlemen are often relied on for fast and
accurate feedback.
A high level of channel feedback is particularly
important for firms in highly competitive
industries.
Feedback is crucial for prospectors.

Designing Distribution Channels: What are

the Objectives to be Accomplished?
Cost-effectiveness
Important to businesses pursuing low-cost
analyzer or defender strategies.

Flexibility
Firms pursuing prospector strategies in new
or rapidly growing or technically turbulent
product categories, consider this important.
A flexible channel is one where it is relatively
easy to switch channel structures or add new
types of middlemen.

Institutions Found in Marketing Channels

Designing Distribution Channels: What

Kinds of Institutions Might Be Included?
Merchant Wholesalers
Some types of merchant wholesalers engage
in a full range of wholesaling functions while
others specialize in only limited services.
Both buy goods from various suppliers and
then resell those goods to their commercial
customers, either industrial buyers or other
resellers such as a retailer.

Designing Distribution Channels: What

Kinds of Institutions Might Be Included?
Agent middlemen do not take title to, or
physical possession of, the goods they
deal in.
Manufacturers agents or manufacturers reps
Sales agents
Brokers
E-Hubs

Designing Distribution Channels: What

Kinds of Institutions Might Be Included?
Retailers
Sell goods and services directly to final
consumers for their personal, nonbusiness
use.
One classification scheme groups stores
according to their method of operation:
Low margin/high turnover
High margin/low turnover

Designing Distribution Channels: What

Kinds of Institutions Might Be Included?
Nonstore Retailing
Includes direct selling, mail-order catalogs, TV
shopping, vending machines, and Web sites.
Auction sites facilitate retail start-ups.

Marketing Channels for Consumer Goods and

Services

Marketing Channels for Industrial Goods and

Services

Which Alternative Is Best?

There are trade-offs among the various
objectives a company might try to
accomplish with its distribution channel.
The decision depends on:
Which distribution objectives are considered
most important,
Which is influenced by the businesss
competitive strategy and the other
components of the marketing program.

Which Alternative Is Best?

Consumer goods and services - Three
basic strategies of retail coverage:
Intensive Distribution
Exclusive Distribution
Selective Distribution

Comparison of Intensive, Exclusive, and Selective Retail

Coverage Strategies

Which Alternative Is Best?

Promotional effort, market information,
and postsale service objectives
The theory of transaction cost analysis (TCA)
argues that when substantial transactionspecific assets are involved, the costs of
using and administering independent channel
members are likely to be higher than the costs
of managing a company salesforce and/or
distribution centers.

Which Alternative Is Best?

Cost-effectiveness
Minimizing physical distribution costs subject
to the constraint of achieving some target
level of product availability and customer
service.
Make-or-buy decisions
Supply chain management

Which Alternative Is Best?

Flexibility
Generally, vertically integrated systems are
difficult to alter quickly.
Channels involving independent middlemen
are often more flexible.

Which Alternative Is Best?

Multichannel distribution
Companies are increasingly using multiple
channels.
Some use dual distribution systems.
Hybrid system is a variation.
Multichannel systems employ separate
channels to reach different target segments.
Members of a hybrid system perform
complementary functions for the same
customer segment.

Example of a Hybrid Marketing Channel

Channel Design for Global Markets

Market entry strategies
Exporting is simple because it involves the
least commitment and risk.
Contractual entry modes are nonequity
arrangements that involve the transfer of
technology and/or skills to an entity in a
foreign country.
Overseas direct investment can be
implemented in two waysthrough joint
ventures or sole ownership.

Channel Design for Global Markets

Contractual entry modes:
Licensing
Franchising
Include contract manufacturing
Turnkey construction contract
Coproduction
Countertrade

Channel Design for Global Markets

Channel alternatives
The use of domestic middlemen who provide
marketing services from a domestic base.
The use of foreign middlemen.

Channel Design for Services

Channel alternatives
Ordinarily, the marketing of services does not
require the same kind of distribution networks
as does the marketing of tangible goods.
Marketing channels for services tend to be
shorthence the emphasis on franchising.

Channel Management Decision

Vertical Marketing Systems
Corporate VMSs
Contractual VMSs
Administered VMSs
Relational VMSs

Vertical Marketing Systems

Channel Management Decision

Sources of channel power
Economic power
Coercive power
Expert power
Referent power
Legitimate power

The power of any firm within a distribution

channel is inversely proportional to how
dependent the other channel members
are on that firm.

Channel Management Decision

Channel control strategies
Pull Strategy
Push Strategy

Channel Management Decision

Trade promotions
Manufacturers typically use a combination of
incentives to gain reseller support and push
their products through the channel.
Most of these incentives constitute sales
promotion activities.
Categories of sales promotion activities:

Consumer promotions
Trade promotions

Channel Management Decision

Trade promotions
Incentives to increase reseller purchases and
inventories
Incentives to increase personal selling effort
Incentives to increase local promotional effort
Incentives to improve customer service
The changing role of incentives in relational
distribution systems

Channel Management Decision

Channel conflicts and resolution strategies
Regardless of how well a manufacturer
administers its channel system, some amount
of channel conflict is inevitable.
Some conflict is essential if members are to
adapt to change.
Conflict should result in more effective and
efficient channel performance, provided it
does not become destructive.

Take-Aways
The importance of good distribution
decisions in designing a marketing plan is
simple: Customers wont buy your good or
service unless it is conveniently available
when and where they want to buy it.

Take-Aways
Distribution channel decisions have a
major economic impact because
distribution costs often exceed the costs of
producing a good or service.

Take-Aways
Channel design involves decisions about
the appropriate types and numbers of
middlemen to include in the distribution
channel in order to link the marketing
strategy for the good or service to the
needs of the target customers.

Take-Aways
Distribution channels can be designed to
accomplish a number of objectives,
including:
Maximizing the products availability,
Satisfying customer service requirements,
Encouraging promotional effort,
Obtaining timely market information,
Minimizing distribution costs, and
Maintaining flexibility.

Take-Aways
A manufacturer or service provider can
attempt to gain the support and direct the
efforts of its channel partners:
Through vertical integration,
By legal contracts,
By providing economic incentives, and/or
By developing mutually beneficial
relationships based on trust and the
expectation of future benefits.

CHANNEL CONFLICT

Channel Conflict
A channel conflict may be defined as A
situation in which one channel member
perceives another channel member(s) to
be engaged in behavior that prevents it
from achieving its goals.
Conflict is opposition, disagreement or
discard among the organizations.

Channel Conflict
Conflict is not always undesirable.
It is needed to have positive effect as
loopholes in the existing system can be
plugged timely and performance can be
maximized.
It can keep other channel members on
their toes knowing that a decline in
performance might lead to a change in the
channel arrangements.

Types of conflict
Each channel member views the conflict, the relationship
and the tensions differently. Following are the types of
channel conflicts
Latent conflict The channel members may be
unaware about the opposition. They do not fully sense
the conflict. This is due to the separate or un-conflicting
goals.
Perceived conflict The channel members sense that
some sort of opposition of perceptions, of interest, or of
intensions exists. It is more psychological, i.e. two
organizations can perceive that they are in disagreement
but their individual members do not consider it as a very
serious issue.

Types of conflict
Felt conflicts When channel members not only
perceive the opposition or disagreement but also feel it
actually they are felt or affective conflicts. This needs to
be sorted out at a early stage to avoid further
consequences.
Manifest Conflict If felt conflicts are not managed in
time and properly, they can become manifest or overt
conflicts and these conflicts stop the cooperation and
understanding between two organizations and block the
other from achieving its goals.
Functional Conflict When channel members accept
that there is opposition and disagreement but actually,
this opposition will improve their relationship, it becomes
functional conflict. It is common, obvious and sometimes
desirable too due to the interdependence of channel
members on each other.

Conflicts can also be

classified as

Vertical conflict
Horizontal conflict
Inter type conflict
Multi Channel conflict

Vertical conflicts
Vertical conflicts occur due to the
differences in goals and objectives,
misunderstandings, and mainly due to the
poor communication
Lack of role clarity and over dependence
on the manufacturers. For e.g. Today the
large retailers dominate the market and
dictate the terms. Hence there are often
conflicts between these giant retailers and
the manufacturers.

 Wholesalers expect manufacturers to

maintain the product quality and
production schedules and expect retailers
to market the products effectively. In turn,
retailers and manufacturers expect
wholesalers to provide coordination
functional services. If they fail to conform
each others expectations, channel conflict
results.

Some common reasons for vertical

conflict are
Dual distribution i.e. manufacturers may
bypass intermediaries and sell directly to
consumers and thus they compete with
the intermediaries.
Over saturation, i.e. manufacturers permit
too many intermediaries in a designated
area that can restrict, reduce sales
opportunities for individual dealer and
ultimately shrink their profits.

 Partial treatment, i.e. manufacturers offer

different services and margins to the
different channels members even at same
level or favor some members.
New channels, i.e. manufacturers develop
and use innovative channels that create
threat to establish channel participants.

 No or inadequate sales support and

training to intermediaries from the
manufacturers.
Irregular communication, non cooperation and rude behavior with the
channel members.

 Stipulation of ordering in advance, high

stock holding and dumping the stock at
the intermediaries.
Delays in delivering the products or
sometimes dispatching the products
without confirmed order.
Refusal to replace or take back the goods
damaged in transit. Non co-operation in
replacement of faulty goods, repairing
services, and installations.

 No co-operative advertisements.
Manufacturers do not share any expenses
of advertisements.
No or inadequate credit offered to the
intermediaries. Margins / commissions are
not sufficient and there is no periodic
revision of commission and other terms

Conflicts due to the

Intermediaries Actions
Intermediaries promote and sell more
private labels than promoting the
manufacturers brands.
Intermediaries encourage customers
to switch to private labels /
competitive products.
Intermediaries carry competing lines
and give more showroom space.

 No support in the manufacturers

promotional efforts.
Intermediaries fail to get the expected
/ promised efforts.
Intermediaries fail to collect payment
from market in stipulated time.

 Intermediaries deliberately cut the

prices to harm the manufacturers.
Intermediaries refuse to service and
install manufacturers products.
No appropriate and timely market
feedback and report to the
manufacturers.

Horizontal conflicts
Horizontal conflicts are the conflicts
between the channel members at the
same level, i.e. two or more retailers, two
or more franchisees etc. These conflicts
can offer some positive benefits to the
consumers. Competition or a price war
between two dealers or retailers can be in
favor of the consumers.

Reasons behind horizontal conflicts

Price-off by one dealer / retailer can
attract more customers of other
retailers.
Aggressive advertising and pricing by
one dealer can affect business of
other dealers.

Reasons behind horizontal conflicts

Extra service offered by one dealer /
retailer can attract customers of others.
Crossing the assigned territory and selling
in other dealers / retailers / franchises
area.
Unethical practices or malpractices of one
dealer or retailer can affect other and spoil
the brand image.

Inter Type conflict

Inter type conflict occurs when, the
Intermediaries dealing in a particular
product starts trading outside their normal
product range. For example, now the
supermarkets such as Foodworld also sell
vegetables and fruits and thus compete
with small retailers selling these products.
Large retailers often offer a large variety
and thus they compete with small but
specialized retailers. This concept is called
as Scrambled Merchandising where the
retailers keep the merchandise lines that
are outside their normal product range.

Multi-channel Conflict
Multi-channel conflict occurs when the
manufacturer uses a dual distribution
strategy, i.e. the manufacturer uses two or
more channel arrangements to reach to
the same market.
Manufacturers can sell directly through
their exclusive showroom or outlets. This
act can affect the business of other
channels selling manufacturers brands.

Multi-channel Conflict
Manufacturers can bypass the
wholesalers and sell directly to the large
retailers. Conflict becomes more intense
in this case as the large retailers can enjoy
more customers and so the profit due to
offering more variety and still economical
prices, which is possible due to a volume
purchase.

Resolving Channel Conflicts

Conflict is a natural phenomenon, which
cannot be eliminated. In channel management,
it is a inevitable as many individuals, institutions
are involved and they are interdependent.
Certain conflicts are constructive too.
The conflicts can be reduced and managed
better to reduce the friction in the channel
management. Various techniques can be used
to resolve the conflicts. It is important to find out
the root cause behind the conflict so that
appropriate technique can be used to resolve
the conflicts and lasting effect is possible.

Some techniques are as follows

Channel leadership Many channel conflicts can be
resolved through the effective channel leadership.
Channel leader is able to reduce conflicts because he
possesses the channel power. Channel power is the
ability of one channel member to influence another
members marketing decisions and goal achievement.
It enables the leader to influence overall channel
performance. The channel leader controls resources
on which other members depend. Channel power can
increase conflict and reduce cooperation if one
channel member uses coercion to influence others.
Manufacturers, wholesalers or even retailers can
become the channel leaders. For example, producers
like IBM, Ford can act as channel leaders because of
their economic power.

 Adoption of Super ordinate goals The

channel members come to an agreement on
the fundamental goal they are jointly seeking,
whether it is survival, market share, high quality
or customer satisfaction.
Exchange of persons between two or more
channel levels This helps in better
understanding. It can reduce the
misunderstanding and conflicts can be reduced
substantially through this communication. Each
will grow to appreciate the others point of view
and carry more understanding when returning
to their position.

 Co-Opt It is an effort by one

organization to win the support of the
leaders of another organization by
including them in advisory councils, board
of directors so that they feel that their
opinions are being heard. Co-optetion can
reduce conflict provided both the parties
compromise some or the other issues in
order to win the support of the other side.

 Joint membership in and between trade

associations Such associations bring all
participants under one roof for more exposure
to the public and to improve relations with each
other by understanding their problems.
Diplomacy Diplomacy takes pace when each
side sends a person or a group to meet with
their counterpart from the other side to resolve
the conflict. It makes sense to assign diplomats
to work more or less continuously with each
other to avoid the conflicts.

 Third-Party Mechanisms When conflict

is chronic, and the above mentioned
techniques are ineffective, both the parties
may have to resort to third parties, which
are not involved or not the part of the
existing channel.
Arbitration In this method, the two parties
agree to present their arguments to a third
party and accept arbitration decisions.

Mediation Mediation implies resorting to a neutral

third party who brings skills in conciliating the
interests of the two parties. Mediation is the process
whereby a third party attempts to secure settlement
of a dispute by persuading the parties either to
continue their negotiations or to consider procedural
recommendations that mediator may make.
Mediator has a fresh view of the situation and may
perceive opportunities that insiders cannot.
Effective mediation succeeds in clarifying facts and
issues. Mediators help the parties to set up their
own decisions whereas in arbitration it can be
compulsory.