Marketing Channels

Part SixPart SixDistribution Decisions

1515Marketing Channels and

Supply Chain Management

Copyright © Houghton Mifflin Company. All rights reserved. 15 | 2

Objectives

1. To describe the nature and functions of marketing channels

2. To explain how supply chain management can facilitate distribution for the benefit of all channel members, especially customers

3. To identify the types of marketing channels

4. To examine the major levels of marketing coverage


Objectives (cont’d)

5. To explore the concepts of leadership, cooperation, and conflict in channel relationships

6. To specify how channel integration can improve channel efficiency

7. To examine the legal issues affecting channel management


Chapter Outline

• The Nature of Marketing Channels

• Types of Marketing Channels

• Intensity of Market Coverage

• Supply Chain Management

• Legal Issues in Channel Management


The Nature of Marketing Channels

• Distribution– The activities that make products available

to customers when and where they want to purchase them

• Marketing Channel– A group of individuals

and organizations directing products from producers to customers



The Nature of Marketing Channels (cont’d)

• Marketing Intermediary– A middleman linking producers to other

middlemen or to ultimate consumers through contractual arrangements or through the purchase and resale of products

ProducerProducerProducer


CustomerCustomerCustomer

CustomerCustomerCustomerIntermediaryIntermediaryIntermediary

Direct ChannelDirect Channel

Indirect ChannelIndirect Channel









Direct ChannelDirect Channel

Indirect ChannelIndirect Channel



• Marketing Channels Create Utility– Time utility: have products

available when the customer wants them (newspaper delivery).

– Place utility: making products available in locations where the customers wish to purchase them (convenience stores).

– Possession utility: the customer has access to the product to use or to store for future use (raincoats).



• Marketing Channels Facilitate Exchange Efficiencies– Reduce the overall costs of marketing

exchanges– Reduce search costs

for customers– Maintain order in the

marketplace


Efficiency in Exchanges Providedby an Intermediary

FIGURE 15.1


Marketing Channels Form a Supply Chain

• Supply Chain Management– Long-term partnerships among marketing channel

members that reduce inefficiencies, costs, and redundancies and develop innovative approaches to satisfy customers

– Optimizes costs throughout the whole channel for efficiency and service

– Includes all entities that facilitate product distribution and benefit from cooperative efforts

– Arises from the need to achieve a more competitive position


Typical Marketing Channels forConsumer Products

FIGURE 15.2


Typical Marketing Channels forBusiness Products

FIGURE 15.3


Distribution Intermediaries

• Industrial Distributor– An independent business that takes title to

business products and carries inventories– Advantages

• Perform needed selling activities in local markets• Are aware of local needs and can pass market

information on to producers• Reduce producers’ capital requirements by holding

inventories for local markets.

– Disadvantages• Difficult to control• Stocking of competing brands• Less likely to handle bulky and slow-selling items • Lack of technical knowledge


Distribution Intermediaries (cont’d)

• Manufacturers’ Agent– An independent businessperson who sells, on

commission, the complementary products of several producers; does not take title to or hold inventories.

– Advantages• Possesses technical and market information• Has an established set of customers• Serves as a substitute for a sales force

– Disadvantages• Difficult to control• Concentration on only large accounts• Sales focus limited to commission-related activities


Debate Issue

Does cutting out the intermediary cut costs?


Multiple Marketing Channels and Channel Alliances

• Dual Distribution– The use of two or more channels to

distribute the same product to the same target market

• Strategic Channel Alliance– An agreement whereby the products of

one organization are distributed through the marketing channels of another


Is This Product Distributed Through Multiple Marketing Channels?

Courtesy of Neutrogena Corp.


Intensity of Market Coverage

• Intensive Distribution– Using all available outlets to distribute a

product.• Convenience products with high replacement

rates

– Provides availability and reduces search time

– Availability is more important than outlet type


Intensity of Market Coverage (cont’d)

• Selective Distribution– Using only some available outlets to

distribute a product• Shopping products and durable

goods with low replacement rates

– High qualification requirements for intermediaries to distribute, sell, service, and support products

Tuscaloosa’s Only

Authorized Dealer


Intensity of Market Coverage (cont’d)

• Exclusive Distribution– Using a single outlet in a fairly large

geographic area to distribute a product• Expensive, high-quality products purchased

infrequently

– Exclusive outlets provide an incentive to sellers in limited markets

– Dealers carry complete inventory and have trained staff for sales and service


Are iPods Distributed Through Intensive, Selective, or Exclusive Distribution?

Reprinted with permission of Apple Computer, Inc. All rights reserved.


Class Exercise

Identify the intensity of market coverage for each of the following products:

1.Potato chips

2.Gucci handbags

3.Large-screen televisions

4.Rolex watches

5.Clinique cosmetics

6.Carbonated beverages

7.Range Rover vehicles


Class Exercise (cont’d)

8.Stereo systems

9.Levi jeans

10.IBM personal computers

11.Gasoline

12.Cannondale bicycles

13.Jaguar automobiles

14.Nintendo video games

15.Reebok shoes


Supply Chain Management:Channel Leadership

• Channel Captain– The dominant member (producer,

wholesaler, or retailer) of a marketing channel or supply chain• Establishes channel policies and

coordinates development of the marketing mix

• Channel Power– The ability of one channel

member to influence another member’s goal achievement


Supply Chain Management:Channel Cooperation

• Benefits of Cooperation– Speeds up inventory replacement– Improves customer service– Reduces distribution costs

• Improving Channel Cooperation– Unifying channel to maintain market order– Agreeing to direct efforts toward common

objectives– Precisely defining each channel member’s

tasks


Supply Chain Management:Channel Conflict

• Sources of Channel Conflict– Disagreements arising among channel members– Communication difficulties jeopardizing

coordination– Increased use of multiple distribution channels by

manufacturers creating conflicts with distributors and retailers

– Intermediaries diversifying into and offering competing products

– Producers attempting to circumvent intermediaries and dealing directly with retailers


Net Sights

• The Stanford Global Supply Chain Management Forum website (www.stanford.edu/group/scforum/Welcome/index.html) promotes excellence in global supply chain management. It is an example of cooperation between industry and academia to improve the way business is conducted on an international scale.

http://www.stanford.edu/group/scforum/Welcome/index.html








Supply Chain Management:Channel Integration

• Vertical Channel Integration– Two or more stages of the marketing channel are

under one management– Channel members coordinate their efforts to

reach a target market

• Vertical Marketing System (VMS)– A marketing channel managed by a

single channel member to achieve efficient, low-cost distribution• Corporate VMS• Administered VMS• Contractual VMS


Legal Issues in Channel Management

• Dual Distribution– A producer can use two different channels to

reach the same target market as long as it is not trying to engage in unfair competition and put its independent distributors out of business

• Restricted Sales Territories– Granting exclusive sales territory rights to

distributors is permissible if the rights do not restrain trade

• Tying Arrangements– Requiring a channel member to buy additional

products from the supplier in order to purchase a particular product from the supplier


Legal Issues in Channel Management (cont’d)

• Full-Line Forcing– Requiring a channel member to carry a supplier’s

entire product line to obtain any of the supplier’s products

• Exclusive Dealing– Forbidding an intermediary to carry products of a

competing manufacturer– Is anticompetitive if

• it blocks competitors from 10% of the market• sales revenues are sizable• the manufacturer is larger than the dealer


Class Exercise

Many manufacturers sell products in outlet stores at 25% to 70% off retail prices. Retailers do not like the added competition from their own suppliers despite manufacturers’ claims that they are only selling last season’s merchandise.

1. How could business objectives, buyer behavior, product attributes, or environmental forces affect a manufacturer’s decision to distribute through outlet stores?



2.By selling in outlet stores, how have these manufacturers changed their intensity of market coverage? How is customer service different at an outlet store?

3.Which of the following may be responsible for the conflict between manufacturers and retailers?• Lack of clear communication• Deviation from role expectations• Diversification into product lines traditionally

handled by other intermediaries



4. Should retailers develop store brands, refuse to stock certain items, or focus their buying power on one supplier or group of suppliers? How should the conflict be resolved?


Legal Issues in Channel Management (cont’d)

• Refusal to Deal– Suppliers can choose their distributors and

refuse to deal with others so long as their decisions are not based on anticompetitive motives or are not part of an organized refusal-to-deal with certain channel members.


After reviewing this chapter you should:

• Be able to describe the nature and functions of marketing channels.

• Be able to explain how supply chain management can facilitate distribution for the benefit of all channel members, especially customers.

• Be able to identify the types of marketing channels.

• Be familiar with the major levels of marketing coverage.


After reviewing this chapter you should:

• Understand the concepts of leadership, cooperation, and conflict in channel relationships.

• Be able to specify how channel integration can improve channel efficiency.

• Be aware of the legal issues affecting channel management.


Chapter Quiz

1. In a simple economy of five producers and five consumers, there would be _________ transactions possible without an intermediary and _________ transactions possible with one intermediary.a. ten; twenty-five

b. thirty; ten

c. twenty-five; fifteen

d. sixteen; eight

e. twenty-five; ten


Chapter Quiz (cont’d)

2. Nationally distributed consumer convenience products are most likely distributed through which of the following channels?a. Producer, consumers

b. Producer, agents, wholesalers, retailers, consumers

c. Producer, wholesalers, consumers

d. Producer, wholesalers, retailers, consumers

e. Producer, industrial distributor, wholesalers, retailers, consumers



3. Honey Farms is a maker of fine chocolates. The company’s latest product, Fudge-Dipped Strawberries, is the premier product in its Fudge-Dipped line. The product is very expensive and targeted to upscale consumers. Which form of distribution would Honey Farms be likely to use for its new product?a. Intensiveb. Selectivec. Targeted d. Exclusivee. Premier



4. Goodyear allows companies like Sears and Discount Tire to distribute and discount its tires. This action significantly increases the possibility of channel _________ with independent Goodyear dealers.a. understanding

b. power

c. leadership

d. communication

e. conflict