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Marketing Channels- Structure and Functions

Book Name: Marketing Channels


Author: Anne T. Coughlan, Erin Anderson, Louis W. Stern, Adel I. El-Ansary

The need to learn about marketing channels


Gatekeeper role of marketing channel Channel can act as an important differentiator Channel experience affects end user perception Need to create an effective channel

We will do this course in a different way There are only 11 classes left This time we will divide the course in 11 topics For each topic a group will have to show 2-3 management movies on that topic. After the movies the group will explain the topic by enacting a drama playing roles decided by the group. This is not an essential requirement The topics will be given today Each class the internal marking will be done by the class. Each student will rank the class on pre defined printed sheet. Average of the class will be that groups marks. There will be no name in the marking sheet. The marks will be exactly equal for each member of the group. This will be a group exercise and not an individual exercise

Manish.nagill@gmail.com rinkubhoriya@gmail.com

Marketing Channels- Structure and Functions


Definition of Marketing Channel
It is a set of interdependent organizations who make a product or service available to the end user for consumption Examples
Clothes (US)
Department stores Focused Specialty stores Factory outlets Online?? Difference in India ???

Marketing Channels- Structure and Functions


Examples
Books (US)
Book Store chains, Barnes & Noble Online, Amazon Discount Stores, 1 dollar store India Example????

Pharmaceutical Drugs

MOVIE: Channels
Evolution of Channels
Demand Side Factors
Facilitation of Search (end user & seller) Adjustment of Assortment Discrepancy Manufacturer : large quantity of a limited variety of goods End User: Limited quantity of a wide variety of goods

Marketing Channels- Structure and Functions


Demand Side Factors
Adjustment of Assortment Discrepancy
Manufacturer : large quantity of a limited variety of goods End User: Limited quantity of a wide variety of goods Assortment functions Sorting, breaking a heterogeneous supply into separate homogeneous stocks e.g. Wheat by quality Accumulation: bringing similar stocks together Allocation: breaking down a homogeneous supply into smaller lots Assorting: collecting related goods for resale Utilities created: Possession, Place and Time

Marketing Channels- Structure and Functions


Supply Side Factors
Routinization of Transactions
Order, value and payment Leads to efficiencies Inventory replenishment programs

Reduction in No. of Contacts


Manufacturer only to Manufacturer , wholesaler and retailer Online disintermediation but also leads to competing with retail chains, important in experience goods (GGN)

Marketing Channels- Structure and


Functions For a business launching mid range fashion wear what are the advantages and disadvantages of
Launching through channels
Advantages

Disadvantages

Launching directly w/o channel

Marketing Channels- Structure and Functions


Role of Marketing Channel
Manages several Flows between Producers, wholesaler and retailers
Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment

Marketing Channels- Structure and Functions


Key Members of a Marketing Channel
Manufacturers Intermediaries
Wholesalers Retailers Specialized

End Users
Individual Consumers Business organizations

Channel Captain

Marketing Channels- Structure and Functions


Key Members of a Marketing Channel
Manufacturers
Branded Private Label Products and Services (insurance) Role of manufacturer

Intermediaries
Wholesale
Distributors, Manufacturers reps, agents and brokers

Retail
Department stores, specialty stores, franchises etc.,

Specialized
Insurance, finance, credit card, logistics, ad firms etc.

Marketing Channels- Structure and Functions


Key Members of a Marketing Channel
End Users
Role as a financer, stockist, risk of spoilage etc.

Channel Formats (Hand out to be read)


Manufacturer based Channel Formats
Manufacturer direct Manufacturer Outlets Licensing Broker

Marketing Channels- Structure and Functions


Channel Formats
Retailer based channel formats
Franchise Cataloguers Food Courts Department stores, shoppers stop Mass Merchandisers . Wal Mart Specialty Stores Convenience stores

Marketing Channels- Structure and Functions


Channel Formats
Service Provider based channel formats
Contract warehousing Direct Mailer VARs Finance Companies

Marketing Channels- Structure and Functions


Framework for Channel Analysis
Designing the right channel Implementing the design Channel Design: Segmentation
Service Outputs
Bulk breaking (allocation), Spatial Convenience, waiting and delivery time, assortment and variety, customer service, information Example of a book buyer as vacationer and as a student having different needs

Marketing Channels- Structure and Functions


Framework for Channel Analysis
Channel Design: Channel Structure Decisions
Who are the channel members Whether to use independent distributors, financing companies, credit card tie-ups etc. Exact identity of the channel member How many also known as channel intensity decision

Marketing Channels- Structure and Functions


Framework for Channel Analysis
Channel Design: Splitting the Workload
ABC analysis

Channel Design: Degree of Commitment


Vertical integration

Channel Design: Gap Analysis


Managerial Bounds Environmental bounds, cigarettes Competitive benchmarks Difference between optimal channel and existing channel: gap

Marketing Channels- Structure and Functions


Framework for Channel Analysis
Channel Implementation: Identifying Power Sources
Inducing all the channel members to perform Using channel power

Channel Implementation: Identifying Channel Conflicts


Channel members goals and objectives (Goal conflict) Domain of action and responsibility in the channel (domain conflict) Differences in the perceptions of the market place (Perceptual) Differentiate between poor channel design and design conflict leading to underperformance Use power to resolve: give discount or increase pull

Marketing Channels- Structure and Functions


Framework for Channel Analysis
Channel Implementation: Channel Coordination
Coordination of interests and actions Coordination of performance

Marketing Channels: Segmentation & Service Outputs


Bucklins model for determining channel structure
Service Outputs
Bulk Breaking Spatial Convenience Waiting or Delivery time Product Variety

Two additional
Customer service Information Provision

Marketing Channels: Segmentation & Service Outputs


Bulk Breaking
Reduces storage costs, increases convenience, per unit cost More the bulk breaking, higher the costs When more or less bulk breaking is required Home v/s Travel BPL class would require what??

Spatial Convenience
Reduces transportation, time taken, and search costs ATMs Cars for service to be picked up from home Does high traffic, bad roads affect this service output

Marketing Channels: Segmentation & Service Outputs


Waiting Time:
Objective is to reduce waiting time for sale or service Faster the delivery more the costs and vice versa Requirements vary

Product variety
Greater the product variety higher the service output & higher the costs Breadth & Depth parameters, varying requirements Assortment Right Assortment & Quick delivery could be a potent combination

Marketing Channels: Segmentation & Service Outputs


Customer Service
Eases the whole process Increases costs, sales and satisfaction Absence ?? Ginger??

Information Provision
Educates end users about product attributes, usage capabilities, prepurchase and post-purchase services Product demos Increases costs Online option

Marketing Channels: Segmentation & Service Outputs


Factors in play while meeting service output demands
Cost,
high cost leads to profit reduction or customer loss Low cost leads to less profit and customer gain

Competition
At same service output level, price needs to better At same prices, better service output is required

Marketing Channels: Segmentation & Service Outputs


Factors in play while meeting service output demands
Ease of Entry
Music CDs from shops Music Online
Assortment Spatial Convenience Quicker delivery

Other Marketing Mix elements

Channel Flows & Efficiency Analysis


Market Flows
Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment

Costs Represented
Storage & delivery costs Inventory Carrying Costs Selling, advertising, sales promotion, publicity, PR Time & Legal Costs Credit, terms & conditions of sale Price guarantees, warranties, insurance, repair, after sale service, spoilage etc. Order processing costs Collections, bad debt cases NIKE CASE STUDY

Channel Flows & Efficiency Analysis


Reverse Logistics (Difference between Forward & Reverse Logistics) Factor
Volume Forecasting Transportation Product Quality Product Packaging Difficult for returns Forward: Bulk shipping Reverse: Variable Forward: Uniform Reverse: Variable Forward: Uniform Reverse: Variable

Channel Flows & Efficiency Analysis


Reverse Logistics (Difference between Forward & Reverse Logistics) Factor
Destination Cost Transparency Forward: Clear cut Reverse: Variable Forward: High Reverse: Less Transparent

GURGAON Handout : On Reverse logistics to be read Handout: Flows

Channel Flows & Efficiency Analysis


Reverse Logistics Channel Flows
Physical Possession Issues Ownership Issues Promotion Issues Negotiation Issues Financing Issues Risking Issues Payment Issues

Channel Flows & Efficiency Analysis


Zero Based Channel Design Equity Principle: Profit Shares
See efficiency template on page 95, figure 3.3

gurgaon

Channel Structure & Intensity


Channel Structure Description
Type of Members Intensity or Number of Members of each type Number of distinct channels

Channel Design Challenges


Level of intensity, intensive, selective, Exclusive How many different forms to pursue, web, stores, third party etc. Should manufacturer have its own or third party channels

Channel Structure & Intensity


Coverage & Assortment
Low involvement purchases (tissue papers etc.) & for convenience goods, higher the coverage, better it is for the manufacturers For downstream, more coverage is not considered positive as it leads to intra-brand competition. Is it desirable??? Channel members Tactics to combat intensive distribution Go in for a substitute less intensely distributed May discontinue a product category Keep a token presence but Attempt to convert the customer to another brand

Channel Structure & Intensity


Intensive Coverage issues
Bait & Switch marketing technique Free Riding ( a renowned store example)

Can be combated by generating pull

Channel Structure & Intensity


Threat of Complacency in limiting intensity Nature of Product Category
Convenience goods Shopping goods like small appliances Specialty Goods like Home Theaters

What happens when a product category is new??

Channel Structure & Intensity


Relationship between brand positioning on quality dimension and intensity Artificial Scarcity strategy (Nike) Can Restrictive Contracts (like ambitious goals etc.) work?? What would a niche product require??

Channel Structure & Intensity


How can manufacturer create influence over channel members?
Selective distribution

Reverse influence

Channel Structure & Intensity


Manufacturer specific investments by Channel Members
Idiosyncratic Knowledge: Unique Unusual handling or storage Brand specific parts and know-how Customer Training Installation and post warranty handling knowledge

Channel Structure & Intensity


Dependence Balancing: Trading territory exclusivity for category exclusivity Influence of Web on buyers: knowledge thru web & buy at the best bargain

Gap Analysis
Environmental bounds
Electric Supply Malls to close on Tuesday

Managerial bounds
Indifference of personnel to new techniques Expertise & Knowledge levels

Types of Gaps
Demand side
When a service output supplied is greater than amount demanded When a service output supplied is less than amount demanded

Gap Analysis
Types of Gaps
Supply side
Cost of providing a service output is high when it can be lower (particularly in reverse logistics) , a cable manufacturer example Bucklins principle of postponement & speculation
(manufacturer v/s consumer, books case, retail sale of CDs v/s downloads)

Closing the Gaps


Demand side gaps
Expand/ Retract the level of service output Offer multiple/ tiered service output levels for different segments Altering the list of segments targeted

Gap Analysis
Supply Side Gaps
Changing the roles of current channel members Investing in new distribution technologies to reduce cost Improve the functioning of the channel

Tackle managerial bounds


Managerial indifference to change (Product Returns) bring in experts to augment expertise

Channel Power
How to define Dependence
B depends more heavily on A if,
B gets some Utility (value, benefits etc.) from A B has fewer alternative sources for that utility

Are both requirements essential??

Channel Power
Approximate Methods to measure power
%age of sales and profits retailer derives from your product How well you perform your role vis--vis competitors
(utility may be missing but excellent service being rare is unique)

Channel Power
French & Raven Approach
Five Sources of Power
FIRST Reward Power (two conditions)
Has the ability to reward Will Reward and share the benefits Requirements Manufacturer must offer a quality service that is valued by end user At a price that end user is willing to pay Saleable in enough quantities for financial rewards to be valued Backed by a minimum required producer reputation And should be delivered reliably CASE STUDY

Channel Power
Second: Coercive Power
If B Fails to perform as per As requirement, A can punish B
Slowing down of shipment Remove exclusivity either territory or category Reduce margins etc. Wal Mart forces bulk breaking on its suppliers e.g. Socks Wal Mart forces suppliers to accept EDI
Leads generally over long run to Target will get less satisfied by money returns Target will become less satisfied by non-financial side Target will see relationship as conflict driven

Channel Power
Should influencer care about targets reactions?
Short Term: Target is less cooperative Medium Term: Target is less trusting Long Term: Target feels less committed Should coercion power not be used at all
EDI??

Channel Power
THIRD: Expert Power
Once expertise is transferred, this power weakens considerably
Dole out expertise in small quantities periodically Invest in continually new learning Transmit only customized information

Using expertise power


Channel member must be trusted Difficult to form relationships with experts Independence mindedness of channel members

Channel Power
Legitimate Power has two sources
Law or legal legitimate power
Patents, trademarks, franchise agreements etc.

Norms or values, traditional legitimate power


Solidarity Role Integrity Mutuality

Cost benefit analysis before enforcing

Channel Power
Referent Power
When A can act as a standard of reference for B and hence B may seek association with A A shares its prestige by allowing B to carry its goods

Balance of Power Net Dependence Imbalanced Dependence Strategies


Develop alternatives Organize a coalition Exit the situation

Channel Power
Converting Latent power to exercised power
Promise Strategy Threat Strategy Legalistic Strategy Request Strategy Information exchange strategy Recommendation strategy

Channel Conflict
Conflict v/s Competition Measuring Conflict
Count the issues of relevance, car dealer Assign importance to each issue, (Im) Frequency of discussion & disagreement, (Fr) Intensity of dispute, (In)
Conflict = Im x Fr x In for each issue Index of Conflict = Sum of Conflicts on each issue

Channel Conflict
Conflict is desirable, Functional Conflict
Increases performance levels

Intense Conflict needs to be resolved

Channel Conflict
Major Sources of Conflict
Competing Goals,
CEOs V/s Owners Principals V/s Channel Partners
Margin Per unit Inventory Marketing costs sharing

Channel Conflict
Major Sources of Conflict
Differing Perceptions of Reality
The attributes of product/service Applications it serves and segments Competition Manufacturer is away from customers and reseller is away from manufacturing

Channel Conflict
Major Sources of Conflict
Clash over Domains
Market Research Quantum of Pre & Post sales support Inventory

Channel Conflict
Major Sources of Conflict
Clash over Market Domains
Intra-channel Competition
Intensive Distribution Reseller representing Competitors

Multiple Channels Clash


Biggest threat : Web

Unwanted Channels
Gray marketing

Channel Conflict
Dangers of Conflict
Conflict begets More Conflict Coercive power gets utilized

Conflict Resolution Strategies


Information Intensive Mechanisms Third party mechanisms, Mediators and Arbitrators Building relational norms

Channel Conflict
Styles of Conflict Resolution
Avoidance Accommodation Competition

Vertical Integration
Forward Integration/ Downstream/Backward/Upstream

Make or buy are strategic choices

Vertical Integration
Degrees of Vertical Integration Buy -----relational governance-----Make
Who does it People Money Risk Responsibility

Vertical Integration
Forward Integration
For control,
Does it work usually?

ROI
Revenues minus direct costs of integration should be positive Resources need to be there There should be no other more lucrative options for that resources

Vertical Integration
Why Outsource?
Motivation
Sales agents v/s. employees
Attraction of rewards Fear of losses

Replaceable agents

Specialization
Core competency
(Prahlad)

Vertical Integration
Why Outsource?
Survival of the Economic Fittest
No possibility of adjusting losses in distribution in any other function

Economies of Scale
Distribution as well as retailing

Vertical Integration
Why Outsource?
Heavier Coverage (assortment)
Also a reason that backward integration is not usual

Independence from a single manufacturer


A consultants role, hence more trust by customers

Vertical Integration
Company specific capabilities in Distribution
Idiosyncratic Knowledge Realtionships Brand Equity Customized physical facilities (car shipments trucks) Dedicated capacity Site specificity

Switching Costs

Questions for Case


What would be the changes in case if it were written now (instead of 2001, US)? (In
the class)

What is the situation in India? (in the class) Write similar case for India in Todays Scenario for Online bill payment. (For 30 Marks), To be submitted in the next class