Marketing Channels

A Marketing Channel is a set of interdependent organizations involved in the process of making a product or service available for USE OR CONSUMPTION

WHO BELONGS TO A MARKETING CHANNEL: MANUFACTURERS INTERMEDIARIES END-USERS

ALTERNATE CHANNEL FORMATS: 1. Manufacturer based Channel Formats: Manufacturers Direct Manufacturer owned full-service distr. Company Store Licensee Brokers

Marketing Flows
P Phy. Poss. > W R Ownership > H O Promotion > O D<Negotiation> L < U<Financing > E < C<Risking >S< E <Ordering A< R <Payment L< S E R S >R > E > T > A< > I < > L< E< R< S > C > O > N >S >U >M E R S/

Industrial/ Household

2. Retailer based Channel Formats: Franchisee Dealer Direct Buying Club Mail-Order Catalogs Food Retailers Department Stores Mass Merchandisers Specialty Stores Specialty Discounters Convenience Store Hypermarket (at least 100,000 sq.ft. floor space)

3.Service provider based Channel Formats: Contract Warehousing Sub-Processors Rail/Truck Integrators (Road-Railers) Roller Freight (Full-Truck Load) Direct Mailers Scheduled Freight Train Outsourcing (IT, Janitorial, Security etc.)

4. Other Channel Formats: Door-to-Door Home Party Multi-Level Vending Kiosk TV Home Shopping Internet Shopping

Distribution Strategy
Corporate Strategy Marketing Strategy Distribution Strategy

FACTORS TO BE LOOKED AT:

* Defining Customer Service Levels What is the customer most interested in? * Defining distribution objectives to achieve these service levels. * Outlining the steps or activities necessary to to achieve these activities. * Deciding on the structure of the network to implement to implement these activities. Could be combination- Inside Resources and Outside Resources * Clearly defined Policies and Procedures. * State Key Performance Indicators. Worked out separately for each Channel Member * Understand the Critical Success Factors to make the distribution Strategy effective

1. Customer Service Level: Categorize: Cat. A= Customers who contribute the maximum to revenues. Cat. B= Customers who contribute regularly but moderate levels of revenues. Cat. C= Low contributors and may not be regular. EXTENT OF COMPETITION LEVEL CAN ALSO DECIDE SERVICE LEVELS.

2. Distribution Objectives: Broadly, to provide:

TIME UTILITY
PLACE UTILITY POSSESSION UTILITY

3. Set of Activities: - Periodic (normally monthly) sales forecasts. - Dispatch to C&F Agents closest to the market. - Beat Plans for Market Coverage. - Collection of Payments. - Promotional Activities. - Regular Sales Calls on Cat. A Customers to build long-term relationships. THESE ARE JUST EXAMPLES OF THE MOST COMMON SET OF ACTIVITIES.

4. Distribution Organization is based on: - Extent of in-company support. - Affordability. - Selecting Channel Partners. - Setting Clear Objectives for each Channel Partner. - Correct Level of Financial Investment by each Channel Partner.

5. Policies and Procedures: - Create an Operations Manual. - Also Requires: - Complaint Redressal - Dispute Settling Mechanisms - Additional, beyond norms, payments to Channel Members - Coverage of institutional business

Key Performance Indicators (KPAs): - Quota/Target Achievement - Market Share Increase - Profitability - Complaints Reduction - Stock Returns - Market Coverage - Emergencies Handling - Damage to Products (Storage Competence) - Collection of Payments AND MANY OTHERS

CRITICAL SUCCESS FACTORS OF STRATEGY: - Clear, transparent and unambiguous Policies and Procedures - Serious commitment of Channel Partners - Fair dealing with Partners - Clearly defined Customer Service Policy - Integrity - Equitable Distribution in times of Shortages - Compensation to Channel Partners on time

Channel Design
Channel Design Process
1. Segmentation 2. Positioning 3. Targeting 4A. Establish New Channels - Channel Flow Performance - Channel Structure 4B. Refine Existing Channels Gap Analysis Channel Flow Performance Channel Structure >> 5. Channel Implementation Identify Power Sources Identify Channel Conflicts

-Define Service Output Demands by Segment. -Identify Environmental characteristics and constraints.

-Define optimal channel flow Performance for each segment.

-Choose segments to target subject to: * Environmental * Managerial Bounds * Competitive Benchmarks

Use Power to Manage Conflicts Goal: Channel Coordination

<<

CHANNEL DESIGN PROCESS

<< CHANNEL IMPLEMENTATION >> PROCESS

Segmentation
Service Outputs - Bulk-Breaking - Spatial Convenience - Waiting or Delivery Time - Product Variety End-User Channel Preferences Trends - In B to B Buyers Out sourcing Downsizing Alphabet Soup- ECR, EFR, JIT etc. - In Consumer Preferences Poverty of time Increased Knowledge- Products/Availability Increased Polarity in Incomes Increased Numbers of Self-Employed Workers Segmenting the market by Service Output Demands: - Typical Parameters: References & Credentials Financial Stability/Longevity Product Demonstrations/Trials Proactive Advice/Consulting Responsive Assistance during the Decision-making process One-stop Solution Lowest Price Installation and Training Support Responsive after sale problem solving Ongoing Relationship with supplier MEETING SERVICE OUTPUT DEMANDS COST COMPETITIVENESS EASE OF ENTRY OTHER ELEMENTS OF EXCELLENCE IN THE MARKETING OFFERING

Positioning
What is the Optimal Channel to serve each Segment? This is called Positioning or Configuration of the Channel OPTIMAL CHANNEL IS DEFINED FIRST & FOREMOST BY THE NECESSARY CHANNEL FLOWS, THAT MUST BE PERFORMED IN ORDER TO GENERATE THE SPECIFIC SEGMENTS SERVICE OUTPUT DEMANDS. Use an Efficiency Template by using Costs, Benefit Potential and assign Weightages. Channel Intensity: How many of each types of Channel Members? Therefore, Channel Structure Decisions of Type, Identity and Intensity of Channel Members should be made with a minimization of Channel Costs in mind. ACTIVITY BASED COSTING (ABC) ANALYSIS IS USEFUL FOR THE BEST ALLOCATION OF CHANNEL FLOWS.

Channel Structure
Decision Process: Who should be a Channel Member? Use Intermediaries? -Is demand for assortment variety low? -Do we have the capability to sell direct? -Can an independent Channel member perform flows at lower cost? - What is the value placed on control of the processes? NO Self-Direct YES What type(s) of Intermediaries to Use? Non-Retail Intermediaries Retail Intermediaries

-What channel flows do we outsource? -What flows does the retailer perform? -Who is willing/available in the target -What retailers are willing/available in the target market to perform the desired flows? Market to perform the desired flows -Is there synergistic value in allocating -How do target end-users currently buy in this multiple flows to one intermediary? Category? WHICH SPECIFIC INTERMEDIARY(IES) TO USE? -How costly is it to use each retail intermediary? -Who is likely to be the most committed and cooperative channel partner to perform each desired flow? CREATE CHANNEL STRUCTURE

APPROPRIATE INTERMEDIARIES
Flow to be Performed Physical Possession Intermediaries Contract Warehouse Shipping Company eg. FedEx, Blue Dart Distributor Retailer Contract Warehouse Retailer Distributor Distributor Independent Sales Representative Broker Retailer Franchisees Distributor Export marketing Company Independent Sales Representative Distributor Broker Retailer Credit Card Company Banks Franchisees Distributor Retailer Credit Card Company Franchisees Distributor Independent Sales Representative Retailer Franchisees Distributor Shipping Company Retailer Franchisees Ownership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

Gap Analysis Framework

Sources of Gaps Environmental Bounds -Local legal constraints -Local physical, retailing infrastructure Types of Gaps Managerial Bounds -Constraints due to lack of knowledge -Constraints due to optimization at a higher level

Demand- side Gaps - SOS<SOD - SOS>SOD -Which Service Outputs?

Closing Gaps Demand-side Gaps -Offer tiered service levels - Expand-contract provision of of service outputs - Change segment(s) targeted

Supply-side Gaps -Flow cost is too high -Which Flows?

Supply-side Gaps -Change flow responsibilities of current channel members -Invest in new low-cost distribution technologies -Bring in new channel members

Gap Analysis Template

Bulk Breaking Level Provided Low-OK-High Efficiency OK-High Cost Source of Problem Spatial Convenience Waiting & Delivery Time Assortment & Variety

Environmental/ Managerial Bounds

Outcome Desired

Tactics to Close Gap

Predicted change in channel perf.

Vertical Integration
Make or Buy: A Critical Determinant of Company Competencies
-Make or Buy: A Difficult Decision -Vertically Integrate or Outsource? -A decision, once made is difficult to reverse -Many companies DO NOT DECIDE HOW TO STRUCTURE CHANNELS! -Just react to opportunities/problems & then give POST FACTO RATIONALE

-THERFORE, IT IS NECESSARY TO FRAME A COHERENT, COMPREHENSIVE RATIONALE AND REACH A DECISION THAT CAN BE CONVEYED CONVINCINGLY

The Continuum of Degrees of Vertical Integration

BUY Classical Market Contracting Third party does it (for a price) Its people Its money Its risk Its responsibility MAKE Vertical Integration You do it

>

Quasi-Vertical Integration
How does the work get done The Costs

>

<

>

<

>

Your people Your money Your risk Your responsibility

Its operation (control) Its gain or loss

You and third party share costs and benefits < The benefits >

Your operation (control) Your gain or loss

FRAMEWORK FOR THE DECISION

- MARSHALL ALL SUPPORTING ARGUMENTS - CHALLENGE PRELIMINARY OUTSOURCE DECISION - IF THE LOGIC OF OUTSOURCING DOES NOT HOLD, THEN CONSIDER WHETHER VERTICAL INTEGRATION CAN REPLACE IT -THREE ROLES: A. REASONS ARE THE ADVOCATE OF OUTSOURCING B. CRITIC WHO ATTACKS THE OUTSOURCING DECISION C. ARBITRATOR WHO DETERMINES WHETHER THE ADVOCATE OF OUTSOURCING HAS BEEN COMPELLINGLY OVERTURNED IF NOT, THE OUTSOURCING DECISION CARRIES THE DAY

Six Reasons To Outsource Distribution

- Motivation - Specialization - Survival of the Economically Fittest - Economies of Scale

- Heavier Market Coverage

- Independence from any single manufacturer

Road Map to the Vertical Integration Decision

Presume Outsourcing is more attractive than Vertical Integration

START HERE > NO > STOP- Outsourcing Preferable IS POTENTIAL BUSINESS MAJOR OR SUBSTANTIAL YES EXAMINE HOW FUNCTION WILL DEVELOP (Take Both Roads and See Where They Go)
Will Performance Ambiguity be High? Will substantial Co-Specific Inv. Accrue? NO YES NO YES STOP Consider Overturning STOP Railway Crossing Outsource Presumption: Vert. Integr. Attractive Volatile, Uncertain Environ. ( accelerates effect of co-spec inv.) Out sourcing Attractive Out sourcing Attractive

Channel Implementation And Performance Measurement

CHANNEL POWER
POWER IS THE ABILITY OF ONE CHANNEL MEMBER (A) TO GET ANOTHER CHANNEL MEMBER (B) TO DO SOMETHING IT OTHERWISE WOULD NOT HAVE DONE. THUS POWER IS THE POTENTIAL TO INFLUENCE. IS POWER GOOD OR BAD? NEITHER- THOUGH IT HAS NEGATIVE CONNOTATIONS: Abuse, Oppression, Exploitation, Inequity & Brutality. THIS VIEW IS ONE-SIDED.

POWER IS THE POTENTIAL FOR INFLUENCE, GREAT BENEFITS CAN BE ACHIEVED BY THE JUDICIOUS USE OF POWER TO DRIVE A CHANNEL TO OPERATE IN A COORDINATED WAY.

Why Marketing Channels Require Power?

- Marketing Channels must work with each other to serve end-users. - THIS INTERDEPENDENCE DOES NOT MEAN WHAT IS GOOD FOR ONE IS GOOD FOR THE OTHER. EACH CHANNEL MEMBER IS SEEKING ITS OWN PROFIT. MAXIMIZING THE SYSTEMS PROFIT IS NOT THE SAME AS MAXIMIZING EACH MEMBERS PROFIT. LEFT ALONE, MOST CHANNEL MEMBERS WILL NOT FULLY COOPERATE TO ACHIEVE SOME SYSTEM LEVEL GOAL.

ENTER POWER, AS A WAY FOR ONE PLAYER TO CONVINCE ANOTHER PLAYER TO CHANGE WHAT IT IS INCLINED TO DO.
THE TOOLS OF POWER CAN BE USED TO CREATE VALUE OR DESTROY IT, TO APPROPRIATE VALUE OR TO REDISTRIBUTE IT. POWER MUST BE EMPLOYED BY CHANNEL MEMBERS, BOTH TO DEFEND THEMSELVES AND TO PROMOTE BETTER WAYS FOR THE CHANNEL TO GENERATE VALUE.

FIVE SOURCES OF POWER

- REWARD POWER
- COERCIVE POWER

- EXPERT POWER
- LEGITIMATE POWER - REFERENT POWER

EXERCISING POWER : INFLUENCE STRATEGIES

SIX INFLUENCE STRATEGIES:
1. PROMISE STRATEGY 2. THREAT STRATEGY 3. LEGALISTIC STRATEGY 4. REQUEST STRATEGY 5. INFORMATION EXCHANGE STRATEGY 6. RECOMMENDATION STRATEGY

USING POWER TO EXERT INFLUENCE

INFLUENCE STRATEGY

POWER SOURCE(S) NECESSARY FOR THIS TO WORK REWARD COERCION LEGITIMACY REFERENT, REWARD, COERCION EXPERT, REWARD EXPERT, REWARD

1. PROMISE 2. THREAT 3. LEGALISTIC 4. REQUEST 5. INFORMATION EXCHANGE 6. RECOMMENDATION

CONSEQUENCES OF EACH STRATEGY

1. PROMISE, THREAT, LEGALISTIC-

Provoke Backlash, perceived as heavy-handed, high pressure tactics. Effective in the short-term, damaging long-term effects. Should be seen as a reward, but often seen as bribe, insulting, unprofessional. Are more subtle, more nuanced. Channel counterparts welcome their usage and do not take offense POWER IS CULTURE SPECIFIC.

2. PROMISE-

3. REQUEST, INFORMATION EXCHANGE, RECOMMENDATION

IMPORTANT CAVEAT:

CHANNEL INFORMATION SYSTEMS

The purpose of CHANNEL INFORMATION SYSTEMS is to collect and analyze data about the operations in order to assess performance and take timely corrective Action to continuously improve performance. ADVANTAGES OF HAVING TIMELY INFORMATION: - Helps in market planning. - Helps in tapping market opportunities. - Keeps marketing people alert against competitive threats. - Helps spot market trends. - Helps develop action plans for growth. - Keeps the company aware of consumer needs. - Quality of marketing decisions depends on the quality of information available.

STAGES IN CHANNEL INFORMATION SYSTEMS

COLLECTION PROCESSING STORAGE USE DEVELOPMENT OF A CIS Decide what information is required Organize information in a manner suitable for interpretation and action Decide who will use the information, when and for what purpose

BASIC CHARACTERISTICS OF A GOOD CIS

- Be an integrated system to handle all regular data. - Be a useful decision support system. - Reflect the style of the marketing organization. - Has to be user friendly and user oriented. - Be convincing to the providers of the information, as why they should keep providing accurate information on time. - Be cost effective. - Should not need verification from other sources. - Be fast and totally reliable. ELEMENTS OF A CHANNEL INFORMATION SYSTEM MARKET INFORMATION COMPETITION TRACKING DISTRIBUTOR PROFILE & DATABASE PRIMARY SALES SECONDARY SALES PRICING TRENDS PROMOTIONS HISTORY PROMOTIONS EVALUATION FREIGHT & STORAGE COSTS INVENTORY CONTROL ORDER HISTORY DISTRIBUTION COST DISTRIBUTOR ROI RETAILER CARDS STATUTORY REPORTING DISTRIBUTORS PAYMENT RECORD

CHANNEL PERFORMANCE EVALUATION

EXPERT OPINION SAYS THAT THE PURPOSE OF DISTRIBUTION IS TO GET A COMPANYS PRODUCTS WITHIN ARMS REACH OF DESIRE.
The frequency of Channel Member Evaluation is based on the following factors: - The degree of control the manufacturer has on channel members. - The importance of the channel member to the performance of the company itself. - The nature of the product is also important in the evaluation frequency decision. - The number of channel members- more the number, more often the evaluation. - The category of the channel member- distributor, stockist, retailer etc. - The agreement or contract in operation with the channel member.

CRITERIA FOR EVALUATION

CRITERIA FOR EVALUATION POPULAR PERFORMANCE MEASURES

Sales Target Achievement

Inventory Management

Selling Resources

Market Coverage

Back Office Support

- Primary Sales - Secondary Sales - Sales Target Achievement - Market Share - Sales Growth - Average Inventory Level - Inventory Turnover - Storage Quality - Number of Salespeople - Target Achievement by each Salesperson - Calls per Day - Productive Calls per Day - Extension of Credit - Support to New Product Launches - Support to Promotions - Use of Computers - Trained Manpower - Reports, Records etc.

EACH CRITERION CAN BE GIVEN A WEIGHTAGE AND THE EVALUATION DONE.

LOGISTICS MANAGEMENT
DEFINITION OF LOGISTICS:

- Logistics means having the right thing at the right place at the right time. TODAY, we also add a rider, at the right cost.
- The procurement, maintenance, distribution and replacement of personnel and materials. - The science of planning, organizing and managing activities that provide goods or services. - A business planning framework for the management of materials, service, information and capital flows. It includes the increasingly complex information, communication and control systems required in todays business environment. - The process of planning, implementation and controlling the efficient, effective flow of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to the customers requirements.

THE BUILDING BLOCKS OF LOGISTICS IN MARKETING CHANNELS

INVENTORY MANAGEMENT IN MARKETING CHANNELS Reasons for Holding Inventory: - Demand surges outstrip production capacity - Economies of Scale in production and transportation - Distance between point of production and the point of consumption means that transportation takes time - Both Supply and Demand are UNCERTAIN Inventory Holding Costs: - Capital: the internal cost of funds multiplied by the value of inventory - Storage: climate control, security, insurance etc. - Obsolescence: loss of value due to the products decay - Quality Loss

REDUCING INVENTORY
- CUT VARIETY BY USING MODULAR DESIGN - MOVE FROM A PUSH SYSTEM TO A PULL SYSTEM eg. TOYOTA - GUARD AGAINST THE BULLWHIP EFFECT:

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Supplier

Consumption Customer Retailer Wholesaler Manufacturer

KEY LOGISTICS ACTIVITIES

- CUSTOMER SERVICE - DEMAND FORECASTING - DISTRIBUTION COMMUNICATIONS - INVENTORY CONTROL - MATERIALS HANDLING - ORDER PROCESSING - AFTER SALES PARTS AND SERVICE SUPPORT - PLANT AND WAREHOUSE SITE LOCATION - PROCUREMENT - PACKAGING - RETURNED GOODS HANDLING - REVERSE LOGISTICS - SALVAGE AND SCRAP DISPOSAL - TRAFFIC AND TRANSPORTATION - WAREHOUSING AND STORAGE