Distribution Strategy

Introduction“Marketing channels are sets of

interdependent organizations involved in the process of making a product or service available for use or consumption” Philip Kotler

Functions of a Distribution Channel

• The main function of a distribution channel is to provide a link between production and consumption.

Importance of Distribution Decision

•Firms market share

•Market penetration

Decisions In Physical Distribution Systems

• Order processing• Warehousing• Inventory• Transportation

Distribution - types of distribution

intermediary• Distributors • Distributors have a similar role to wholesalers – that of taking

products from producers and selling them on. They also usually have a much narrower product range. Distributors are often involved in providing after-sales service.

WholesalersWholesalers stock a range of products from several producers. The role of the wholesaler is to sell onto retailers. Wholesalers usually specialise in particular products.

Franchises

Franchises are independent businesses that operate a branded product (usually a service) in exchange for a licence fee and a share of sales.

Agents

Agents sell the products and services of producers in return for a commission (a percentage of the sales revenues)

•Retailers

•Retailers operate outlets that trade directly with household customers. Retailers can be classified in several ways:• Type of goods being sold( e.g. clothes, grocery, furniture)•Type of service (e.g. self-service, counter-service)• Size (e.g. corner shop; superstore)• Ownership (e.g. privately-owned independent; public-quoted retail group• Location (e.g. rural, city-centre, out-of-town)• Brand (e.g. nationwide retail brands; local one-shop name)

Number of Channel Levels

• Size of the market• Service requirement• Complexity of product• Price• Order lot size

Basic Channels of Distribution

Manufacturers/products

Agents/brokers

Wholesalers/distributors

RetailersRetailers

Consumers and organizational end users

Transaction Cost by Channels

As the value-added increases, the cost of transaction also increases

• Direct marketing channels—low value-added; low cost of transactions e.g. e-commerce, telemarketing

• Indirect marketing channels—medium value-added; medium cost of transactions e.g. retail stores, distributors

• Direct sales channels—high value-added; high cost of transactions e.g. own sales force

Distribution Objectives

• Minimize total distribution costs for a given service output

• Determine the target segments and the best channels for each segment

• Objectives may vary with product characteristics– e.g. perishables, bulky products, non-

standard items, products requiring installation & maintenance

Role of Intermediaries

• Information• Price stability• Promotion• Financing• Title

Factors Influencing Distribution Decision

• Marketing Mix Strategy• External Environmental Factors• Market Characteristics• Consumer Preference And

Behaviour

Marketing Mix Strategy• Long term strategic pricing plan

determines distribution through high margin outlets or high volume outlets

• Product characteristics • Image of the product• After sales service

External Environmental Factors

• Government policy• State of the economy• Infrastructure development

Market Characteristics• No of customers• Average purchase• Type of customers

Aligning Channels With How Customers Buy

• Identify customers’ channel preferences and buying behavior

• Tabulate channel selection to key buying criteria

• Provide flexible channel options• Monitor (and respond to) changes in

buying behavior

Distribution-Scope Strategies

• Exclusive Distribution– Limiting the distribution to only

one intermediary in the territory

• Intensive distribution– Distribute from as many outlets

as possible to provide location convenience

• Selective distribution– Appoint several but not all

retailers

Example of Exclusive Distribution

• LEICA was officially appointed Jebsen & Jebsen Marketing as the exclusive distributor for Singapore, Malaysia, Thailand, Indonesia and Brunei

• A main factor in choosing J&J was its expertise in “high-quality technical products on the consumer market.”

Source: Smartinvestor, Singapore Ed. June 2000

Exclusive Distribution:Advantages

• Maximize control over service level/output• Enhance product’s image & allow higher

markups• Promotes dealers loyalty, better

forecasting, better inventory and merchandising control

• Restricts resellers from carrying competing brands

Exclusive Distribution: Disadvantages

• Betting on one dealer in each market

• Only suitable for high price, high margin, and low volume products

Example of Intensive Distribution

• Newspapers• Most fast moving consumer goods

you see in the newsstand• Photo processing shops

• Advantages:– Increased sales, wider customer

recognition, and impulse buying

• Disadvantages:– Characteristically low price and low-margin

products that require a fast turnover – Difficult to control large number of retailers

Intensive Distribution

Example of Selective Distribution

Daewoo have 2 distributors in Singapore• “Starsauto, part of a larger Indonesian group,

represents Daewoo’s traditional line of sedans.• Homegrown family-owned JTA Motors market

Daewoo’s offroad vehicles like the Musso and Korando, and an upmarket model called the Chairman.

(Source: BT, Motoring, Feb4/1999)

Selective Distribution

• Advantages:– Better market coverage than exclusive

distribution– More control and less cost than intensive

distribution– Concentrate effort on few productive

outlets– Selected firms capable of carrying full

product line and provide the required service

Selective Distribution (cont’d)

• Disadvantages:– May not cover the market adequately– Difficult to select dealers (retailers)

that can match your requirement and goals

Multiple-Channel Strategy

Using two or more different channels to distribute goods and services

• Why?– Permits optimal access to each market

segment– Increase market coverage, lower channel

cost and provide more customized selling

• What to look out for?– More channels usually means more

conflict and control problems

Complementary Channels

Each channel handles a product or segment that is different or non-competing e.g.

• Toyota Lexus• Magazine distributions

Competitive Channels

The same product is sold through two different and competing channels e.g.– Non-prescriptive drugs– Electronic goods

• Why? To increase sales• What to look out for?

– Over extending yourself– Dealers’ resentment– Control problems

Modifying Distribution Strategies

Modify when the following changes occur:• Consumer markets and buying habits• Customer needs• Competitor’s perspectives• Relative importance of outlet types• Manufacturer’s financial strength• Sales volume level of existing products,

and• The marketing mix

Channel-Control Strategy

• Vertical Marketing System (VMS)– Also known as centrally

coordinated, professionally managed and centrally programmed network systems

– The emerging trend in ASPAC replacing existing conventional marketing channels

– Classified into corporate, administered and contractual VMS

Channel-Control Strategy (cont’d)

Horizontal Marketing System• One company putting together different

resources to exploit a marketing opportunity.

• Eg. ITC E-choupals• Aqua, Soya, Planters.net.com set up in A

P. M P and Karnataka.

Competitive Advantage of Channels

• Traditional means of achieving competitive advantage is through products but can be easily copied

• Low-cost as a competitive advantage– Also suffer from sustainability

• Brands as competitive advantage– Only if you are a strong brand

• Marketers are turning more and more to channels as a competitive advantage e.g. Dell ComputerSource: The Channel Advantage by Friedman and Furey