channel concept

A Strategic Tool of Growing Importance for the Next Millennium

(1) (1) Search for Sustainable Competitive Search for Sustainable Competitive AdvantageAdvantage

(2) (2) Growing Power of Retailers in Growing Power of Retailers in Marketing Marketing ChannelsChannels

(3) (3) The Need to Reduce Distribution CostsThe Need to Reduce Distribution Costs(4) (4) The Increased Role and Power of The Increased Role and Power of

TechnologyTechnology(5) (5) The New Stress on GrowthThe New Stress on Growth

A competitive A competitive advantage that cannot advantage that cannot be quickly and easily be quickly and easily copied by competitorscopied by competitors

Product StrategyProduct Strategy- rapid technology rapid technology transfer enables competitors to quickly transfer enables competitors to quickly produce similar productsproduce similar products

Pricing StrategyPricing Strategy- global economy global economy allows competitors to find low cost allows competitors to find low cost production to match pricesproduction to match prices

Promotion StrategyPromotion Strategy- high cost, clutter, high cost, clutter, and short life promotional campaigns and short life promotional campaigns limit competitive advantagelimit competitive advantage

Competitive Advantage Based on

Channel Strategy is Long TermChannel Strategy is Long TermRequires a Channel StructureRequires a Channel StructureDepends on Relationships and Depends on Relationships and PeoplePeople

Requires Effective Requires Effective Interorganizational ManagementInterorganizational Management

RetailersRetailers

Are Growing LargerAre Growing Larger Enjoy Substantial Channel PowerEnjoy Substantial Channel Power Act as Buying Agents for Customers Act as Buying Agents for Customers

Rather than Selling Agents for Rather than Selling Agents for SuppliersSuppliers

Often Operate on Low Price / Low Often Operate on Low Price / Low Margin ModelMargin Model

Operate in Saturated Markets and Operate in Saturated Markets and Fight for Market ShareFight for Market Share

77.6%

22.4%

Top 50

Rest

Concentration of Sales Among the

Top 50 Retail Firms

69%

31%

56%

44%

79%

21%

55%

45%

58%

42% FourLargestFirms

All OtherFirms

64%

36%

Kinds of Retailers Where Largest Four Firms Kinds of Retailers Where Largest Four Firms Account for At Least 50% of Total SalesAccount for At Least 50% of Total Sales

Conventional Conventional Department StoresDepartment Stores

DiscountDiscountMass MerchandisersMass Merchandisers

Variety StoresVariety Stores

Misc. GeneralMisc. GeneralMerchandisersMerchandisers

Athletic FootwearAthletic Footwear Toy StoresToy Stores

62.8

7.01.8 1.6

83.5

14.615.613.1

$10,000,000or more

$5,000,000 to$9,999,999

$1,000,000 to$4,999,999

Less than$1,000,000

Sales as a percentage ofthe total

Firms as a percentageof the total

Percentage Distribution of Retail Firms and SalesPercentage Distribution of Retail Firms and Salesby Size of Firmsby Size of Firms

Retailer

Retailers Act as Buying Agents Retailers Act as Buying Agents for Customers Rather than as for Customers Rather than as Selling Agents for SuppliersSelling Agents for Suppliers

Retailers Often Operate on Low Retailers Often Operate on Low Price / Price / Low Margin ModelLow Margin Model

Retailers Operate in Saturated Retailers Operate in Saturated Markets and Fight for Market Markets and Fight for Market ShareShare

Thus, Effective Channel Strategy Thus, Effective Channel Strategy for Dealing with for Dealing with

Power Retailers is CrucialPower Retailers is Crucial

DistributionDistributionCostsCosts

Sometimes Distribution Costs Sometimes Distribution Costs are are Higher Higher than the Manufacturing than the Manufacturing

Cost or the Costs of Raw Cost or the Costs of Raw Materials and Component PartsMaterials and Component Parts

Autos Autos SoftwareSoftware GasolineGasoline Fax MachinesFax Machines Packaged FoodsPackaged Foods

DistributionDistribution

ManufacturingManufacturing

Raw MaterialsRaw Materialsandand

ComponentsComponents

15%15%

40%40%

45%45%

25%25%

65%65%

10%10%

28%28%

19%19%

53%53%

30%30%

30%30%

40%40%

41%41%

33%33%

26%26%

DisintermediatiDisintermediationon

The InternetThe Internet Wireless CommunicationsWireless Communications B2C and B2B E-CommerceB2C and B2B E-Commerce Cell PhonesCell Phones Global TelecommunicationsGlobal Telecommunications Robotics & Automated Robotics & Automated

WarehousingWarehousing Computerized “Salespeople”Computerized “Salespeople”

CompetitionCompetition

OutOutReengineeringReengineeringRestructuringRestructuringDownsizingDownsizing

Flat Flat OrganizationOrganization

ssLean and MeanLean and Mean

In In GrowthGrowth

ExpansionExpansionNew MarketsNew MarketsMarket ShareMarket Share

Top Line Top Line RevenueRevenue

TranslationTranslation

By getting channel members to focus on yourBy getting channel members to focus on yourproducts to a greater extent than yourproducts to a greater extent than your

competitors, you gain market share and competitors, you gain market share and growthgrowth

(1) (1) Search For Competitive Search For Competitive AdvantageAdvantage

(2) (2) Growing Size and Power of Growing Size and Power of RetailersRetailers (3) (3) Need to Reduce Distribution CostsNeed to Reduce Distribution Costs(4) (4) Power and Potential of Power and Potential of

TechnologyTechnology(5) (5) Stress on Growth Instead of Stress on Growth Instead of Downsizing Downsizing

Marketing Channel Strategy Marketing Channel Strategy Has Become Critically Has Become Critically Important For Most Important For Most BusinessesBusinesses

The broad principles by The broad principles by which a firm expects to which a firm expects to achieve its distribution achieve its distribution objectives for satisfying objectives for satisfying

its customersits customers

(1) (1) What role should distribution play in the firm’s What role should distribution play in the firm’s overall objectives and strategies? overall objectives and strategies?

(2) (2) What role should distribution play in the What role should distribution play in the marketing mix?marketing mix?

(3) (3) How should the firm’s marketing channels be How should the firm’s marketing channels be designed to achieve its distribution objectives?designed to achieve its distribution objectives?

(4) (4) What kinds of channel members should be What kinds of channel members should be selected to meet the firm’s distribution selected to meet the firm’s distribution objectives?objectives?

(5) (5) How can the marketing channel be managed How can the marketing channel be managed to implement the firm’s channel design to implement the firm’s channel design effectively and efficiently on a continuing basis?effectively and efficiently on a continuing basis?

CCss = f (P = f (P11, P, P22, P, P33, P, P44))where:where:CCss= degree of customer satisfaction= degree of customer satisfactionPP11= product strategy= product strategyPP22= pricing strategy= pricing strategyPP33= promotional strategy= promotional strategyPP44= place (channel strategy)= place (channel strategy)

Distribution appears to be the most Distribution appears to be the most relevant variable for satisfying relevant variable for satisfying customerscustomers

Parity exists among competitors in the Parity exists among competitors in the other three marketing mix variablesother three marketing mix variables

High degree of vulnerability exists High degree of vulnerability exists because of competitors’ neglect of because of competitors’ neglect of distributiondistribution

Distribution channel strategy can foster Distribution channel strategy can foster synergiessynergies

Dual DistributionDual DistributionExclusive DealingExclusive DealingFull-Line ForcingFull-Line ForcingPrice DifferentiationPrice DifferentiationPrice MaintenancePrice MaintenanceRefusal to DealRefusal to DealResale RestrictionsResale RestrictionsTying AgreementsTying Agreements

When Do Customers Buy?When Do Customers Buy?Where Do Customers Buy?Where Do Customers Buy?How Do Customers Buy?How Do Customers Buy?Who Buys?Who Buys?

Who makes the actual purchase?Who makes the actual purchase?Who uses the product?Who uses the product?Who takes part in the buying Who takes part in the buying

decision?decision?

Supply Chain Management takes Supply Chain Management takes a broader perspective by a broader perspective by viewing logistics as an integral viewing logistics as an integral part of the marketing channel part of the marketing channel relationshiprelationship

A long-term “partnership” among marketing channel A long-term “partnership” among marketing channel participants aimed at reducing inefficiencies, costs, and participants aimed at reducing inefficiencies, costs, and redundancies in the logistical system in order to provide redundancies in the logistical system in order to provide high levels of customer servicehigh levels of customer service

Factor

Inventory ManagementInventory Management

Total Cost ApproachTotal Cost Approach

Time HorizonTime Horizon

Information Sharing and Information Sharing and

MonitoringMonitoring

Joint PlanningJoint Planning

Compatibility of CorporateCompatibility of Corporate

PhilosophiesPhilosophies

Channel LeadershipChannel Leadership

Sharing of Risks andSharing of Risks and

RewardsRewards

Inventory FlowInventory Flow

Traditional

Logistics SystemLogistics System

Independent EffortIndependent Effort

Minimize Firm CostsMinimize Firm Costs

Short-TermShort-Term

Limited to Needs ofLimited to Needs of

Current TransactionCurrent Transaction

Transaction BasedTransaction Based

Not RelevantNot Relevant

Not NeededNot Needed

Each Channel MemberEach Channel Member

on Their Ownon Their Own

““Warehouse” MentalityWarehouse” Mentality

Storage Safety StocksStorage Safety Stocks

Supply Chain Mgmt. System

Joint Effort to ReduceJoint Effort to Reduce

Channel InventoriesChannel Inventories

Channel-Wide Cost EfficienciesChannel-Wide Cost Efficiencies

Long-TermLong-Term

Continuous Effort toContinuous Effort to

Gather and MonitorGather and Monitor

OngoingOngoing

Important for Major InitiativesImportant for Major Initiatives

Required for Required for

Coordination and FocusCoordination and Focus

Risks and Rewards SharedRisks and Rewards Shared

over Long-rangeover Long-range

““Distribution Center”Distribution Center”

Orientation-JIT, Quick Orientation-JIT, Quick

Response, Cross DockingResponse, Cross Docking

Contrasts Between a Traditional Logistics System and Supply Chain Based SystemContrasts Between a Traditional Logistics System and Supply Chain Based System

1. 1. Order Processing TimeOrder Processing Time2. 2. Order Assembly TimeOrder Assembly Time3. 3. Delivery TimeDelivery Time4. 4. Inventory ReliabilityInventory Reliability5. 5. Order Size ConstraintsOrder Size Constraints6. 6. Consolidation StipulationConsolidation Stipulation7. 7. Consistency of DeliveryConsistency of Delivery8. 8. Frequency of Sales VisitsFrequency of Sales Visits9. 9. Ordering ConvenienceOrdering Convenience10. 10. Order Progress Order Progress

InformationInformation11. 11. Inventory Backup Inventory Backup

During PromotionDuring Promotion12. 12. Invoice FormatsInvoice Formats13. 13. Physical Condition of Physical Condition of

GoodsGoods

14. 14. Claims ResponseClaims Response15. 15. Billing ProceduresBilling Procedures16. 16. Average Order Cycle TimeAverage Order Cycle Time17. 17. Order Cycle Time VariabilityOrder Cycle Time Variability18. 18. Rush ServiceRush Service19. 19. Product AvailabilityProduct Availability20. 20. Competent Technical RepsCompetent Technical Reps21. 21. Equipment DemonstrationsEquipment Demonstrations22. 22. Availability of LiteratureAvailability of Literature23. 23. Accuracy in Filling OrdersAccuracy in Filling Orders24. 24. Terms of SaleTerms of Sale25. 25. Protective PackagingProtective Packaging26. 26. Degree of CooperationDegree of Cooperation

Continuing and mutually supportive Continuing and mutually supportive relationship between the relationship between the manufacturer and its channel manufacturer and its channel members in an effort to provide a members in an effort to provide a more highly motivated team, network, more highly motivated team, network, and alliance of channel partnersand alliance of channel partners

(1) (1) Recognition of interdependence of Recognition of interdependence of channel channel membersmembers

(2) (2) Close cooperation between channel Close cooperation between channel membersmembers

(3) (3) Careful specification of roles, rights, and Careful specification of roles, rights, and responsibilities in the relationshipresponsibilities in the relationship

(4) (4) Coordinated effort focused on common Coordinated effort focused on common goalsgoals

(5) (5) Good communications and trust Good communications and trust between between channel memberschannel members

The practice of building long-term relations with key The practice of building long-term relations with key parties - customers, suppliers, distributors- in order to parties - customers, suppliers, distributors- in order to retain their long-term preference and businessretain their long-term preference and business

Because of the importance of channels of distribution, Because of the importance of channels of distribution, building good relationships in the marketing channel is building good relationships in the marketing channel is key to successful relationship marketingkey to successful relationship marketing

Find Out the Needs and Problems of Find Out the Needs and Problems of Channel MembersChannel Members

-informal information system -informal information system (“grapevine”)(“grapevine”)

-research studies of channel -research studies of channel membersmembers

-research studies by outside parties-research studies by outside parties-marketing channel audit-marketing channel audit-distributor advisory councils-distributor advisory councils

Offer Support to Channel Members Offer Support to Channel Members that is Consistent with Their Needs that is Consistent with Their Needs and Helps Solve their Problemsand Helps Solve their Problems

-cooperative arrangements-cooperative arrangements-partnerships and strategic -partnerships and strategic

alliancesalliances-distribution programming-distribution programming

Provide Leadership to Motivate Provide Leadership to Motivate Channel Members Channel Members

-use power effectively-use power effectively-recognize causes of conflict-recognize causes of conflict-resolve conflicts-resolve conflicts

Reward PowerReward PowerCoercive PowerCoercive PowerLegitimate PowerLegitimate PowerReferent PowerReferent PowerExpert PowerExpert Power

Effective Channel Management Depends Effective Channel Management Depends on How Well These Power Bases are on How Well These Power Bases are

Combined and UsedCombined and Used

Role IncongruitiesRole IncongruitiesResource ScarcitiesResource ScarcitiesPerceptual DivergenciesPerceptual DivergenciesExpectational DifferencesExpectational DifferencesDecision Domain Decision Domain

DisagreementsDisagreementsGoal IncompatabilitiesGoal IncompatabilitiesCommunication DifficultiesCommunication Difficulties

1. 1. Growing Emphasis on Marketing Channel Growing Emphasis on Marketing Channel Strategy Strategy

2. 2. More and More Stress on TechnologyMore and More Stress on Technology3. 3. Focus on Efficiency and Reducing Focus on Efficiency and Reducing

Distribution CostsDistribution Costs4. 4. Shortening and Flattening of Shortening and Flattening of

Distribution Distribution Channels (Disintermediation)Channels (Disintermediation)5. 5. Development of New Types of Development of New Types of

Intermediaries in Channels Intermediaries in Channels (Reintermediation)(Reintermediation)

6. 6. Continued Growth in Partnerships and Continued Growth in Partnerships and Alliances (Relationship Marketing) Alliances (Relationship Marketing)

7. 7. Increasing Power for Retailers and Increasing Power for Retailers and Wholesalers (Gatekeepers)Wholesalers (Gatekeepers)

8. 8. Mergers and Acquisitions to Gain Mergers and Acquisitions to Gain Distribution CloutDistribution Clout

9. 9. Flexible and Focused Distribution to Flexible and Focused Distribution to Match Match Micro, Niche, and Database Micro, Niche, and Database MarketingMarketing

10. 10. Attention to the Behavioral Attention to the Behavioral Dimensions of Distribution to Dimensions of Distribution to Augment TechnologyAugment Technology