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Chapter 15Channels of Distribution:Conflict, Cooperation, and

Management

Copyright © 2001 by McGraw-Hill Ryerson Limited

Sommers Sommers Barnes BarnesNinth Canadian EditionNinth Canadian Edition

Presentation byPresentation by

Karen A. BlotnickyKaren A. Blotnicky

Mount Saint Vincent University, Halifax, NSMount Saint Vincent University, Halifax, NS

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 2

Chapter GoalsTo gain an understanding of:• The nature and importance of intermediaries• What a distribution channel is and does• The decisions involved in designing a channel of

distribution• Major channels used to distribute consumer

goods, business goods, and services• Vertical marketing systems• Intensity of distribution• Choice of intermediaries and conflict

management• Legal considerations and channel arrangements

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 3

The Distribution Function• distribution is about getting the product or

service to the customer as conveniently as possible; it deals with access and availability

• intermediaries intermediaries perform many of the distribution functions on behalf of suppliers

• merchant intermediariesmerchant intermediaries actually take title to physical products that they distribute

• agentsagents do not ever own the products, but they arrange the transfer of title

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 4

Distribution Channels• The role of distribution entails:

• Arranging for its sale and transfer of title

• Promoting the product• Storing the product• Assuming some risk during

distribution.• Intermediaries often perform these

activities for producer or consumer.

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• Provides market information• Interprets consumers’ wants• Promotes producers’ products• Creates assortments• Stores products• Negotiates with customers• Provides financing• Owns products• Shares risks

• Anticipates wants• Subdivides large quantities of a product• Stores products• Transports products• Creates assortments• Provides financing• Makes products readily available• Guarantees products• Shares risks

SALES SPECIALISTFOR PRODUCERS

PURCHASING AGENTFOR BUYERS I

NTERMEDIARY

The Distribution Functions

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Designing the ChannelChannel design is a strategic

marketing tool. Four decisions can be help a firm design a distribution channel:

• what role distribution is to play in achieving objectives

• what type of channel is needed? with or without intermediaries?

• what level of intensity of distribution?• which specific intermediaries to use?

which will be best suited to achieve objectives?

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 7

Specifythe role ofdistributionwithin themarketingmix

Selecttype ofdistribu-tion channel

Determine appropriateintensityof distri-bution

Choosespecificchannelmembers

The Well-Designed Distribution Strategy

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Selecting the Type of Channel• some firms will distribute directly; others

will use a number of intermediaries:• producerconsumer (direct)(direct)• producerretailerconsumer• producerwholesalerretailer consumer• produceragentretailerconsumer• produceragentwholesaleretailercons

umer• when would each of these be considered?

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Major Distribution Channels

• For distribution of consumer goods, five different types of channels are widely used.

• Business goods are normally distributed through four major types of channels.

• There are only two common channels of distribution for services.

• Some producers are not content to use only a single distribution channel and use multiple multiple channels channels (a.k.a dual distribution dual distribution)

• Multiple channels can aggravate middlemen and cause conflicts in the channels.

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 10

ULTIMATE CONSUMERS

PRODUCERS OF CONSUMER GOODS

Retailers Retailers Retailers Retailers

Merchantwholesalers

Merchantwholesalers

Agents Agents

Consumer Channels

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BUSINESS USERS

PRODUCERS OF BUSINESS GOODS

Merchant wholesalers(industrial distributors)

Agents Agents

Merchant wholesalers(industrial distributors)

Business Channels

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ULTIMATE CONSUMERS OR BUSINESS USERS

PRODUCERS OF SERVICES

Agents

Service Channels

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Multiple Distribution Channels• some firms will use several distribution

channels to reach specific markets or segments

• dual distribution is used, for example, to reach business and consumer markets, or to carry different groups of products

• or may be used to reach different segments of the seller’s market; different sizes of buyers or different regions of the country

• some companies operate their own stores

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Vertical Marketing Systems (VMS)• a tightly coordinated distribution channel

designed to improve operating efficiency and marketing effectiveness.

• Corporate VMS:Corporate VMS: One firm owns other firms in channel or the entire channel-- Goodyear, Roots.

• Contractual VMS:Contractual VMS: Independents work together for much greater effectiveness: IGA, IDA.

• Administered VMS:Administered VMS: Relies on economic power of one channel member-- Rolex, Kraft General Foods..

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 15

INTENSIVE SELECTIVE EXCLUSIVE

Distributionthrough every

reasonableoutlet in a

market

Distributionthrough multiple,

but not all,reasonableoutlets in a

market

Distributionthrough a single

wholesalingmiddleman

and/or retailerin a market

Intensity of Distribution

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 16

Considerations in Channel Choice• Market Considerations: Type of market,

concentration, potential customers, order size.

• Product Considerations: Consider unit value, perishability, technical nature of product.

• Intermediaries Considerations: Services offered, availability, attitude, dominance.

• Company Considerations: Desire for channel control, management, money and services seller can provide to support sales.

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 17

Conflict and Control in Channels• Channel conflictChannel conflict exists when channel members

interfere with each others’ objectives.• Horizontal conflictHorizontal conflict involves firms on same

level-- grocery store vs. drug store.• Vertical conflictVertical conflict involves firms at different levels

• producer versus wholesaler• producer versus retailer

• Channel PowerChannel Power is the ability to influence or determine behaviour of others in channel.• Based on expertise, rewards and sanctions.

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 18

Producer/Retailer ConflictSmall suppliers’ complaints about

large department stores:• Onerous logistical demands.• Pressure to cut prices.• Demands to give the stores exclusivity.• Forcing suppliers to contribute

advertising and promotional dollars to the stores.

• Requiring suppliers to invest in elaborate computerized inventory systems.

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 19

Small suppliers’ complaints about discounters:• Being asked to supply their goods on

consignment.• Being asked to deal directly with the retailers’

headquarters and to give to the retailer an amount equal to the commission that would have gone to manufacturers’ agents.

Responses from smaller suppliers:• Quit doing business with big retailers whose

demands are too strict and outlandish.• Become a retailer.• Merge with another manufacturer.

More Complaints

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Legal Considerations• Dealer SelectionDealer Selection:: Refusing to sell to

some firms. Can be done carefully.• Exclusive DealingExclusive Dealing involves shutting

out competitors, giving most business to one firm.

• Tying ContractsTying Contracts involves providing one item on condition other lines be carried as well.

• Exclusive TerritoriesExclusive Territories can create monopolies.

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 21

Channels for Entering Foreign Markets

• Exporting,Exporting, through:• An export merchantexport merchant in the manufacturer's

country that buys goods and exports them.• An export agentexport agent located in either the

manufacturer's or the destination country.• A company’s sales branches.company’s sales branches.

• Contracting,Contracting, via:• Licensing:Licensing: Right to use production process,

patents, trademarks, or other assets.• Franchising.Franchising.• Contract manufacturingContract manufacturing:: having a foreign-

based manufacturer produce the product

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 22

More Foreign Market Entry Channel Options

• Direct investment,Direct investment, including:• Joint ventureJoint venture or partnership with

a foreign company.• Strategic allianceStrategic alliance.• Wholly-owned subsidiaries.Wholly-owned subsidiaries.

• Multinational corporationMultinational corporation,, in which the foreign and domestic operations are integrated and are not separately identified.

Copyright © 2001 McGraw-Hill Ryerson Limited15 - 23

The Changing Face of Distribution• Internet (“click and mortar” vs.

“brick and mortar”) a major factor-- where is it heading?

• Direct Response TV sales are growing in popularity, especially for time-starved shoppers

• “The world’s largest bookstore” is on the Internet! (Amazon.com)