Marketing ChannelsMarketing Channels

A Strategic Tool of Growing Importance for the Next Millennium

by Dr. Bert Rosenbloom

A: Over the past three decades, the A: Over the past three decades, the overwhelming emphasis in the overwhelming emphasis in the

Marketing Mix has been on:Marketing Mix has been on: Product Strategy Product Strategy with with

Pricing Strategy Pricing Strategy and and Promotional Strategy Promotional Strategy

also being stressed.also being stressed.

But.....But.....

Marketing Channel Strategy Marketing Channel Strategy (Place); the fourth “P” in the (Place); the fourth “P” in the

Marketing Mix hasMarketing Mix hasbeen largely neglectedbeen largely neglected

But this is changing....But this is changing....

Marketing Channel Strategy is Marketing Channel Strategy is Growing in Importance. Why?Growing in Importance. Why?

Five ReasonsFive Reasons

(1) (1) Search for Sustainable Competitive AdvantageSearch for Sustainable Competitive Advantage

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

(3) (3) The Need to Reduce Distribution CostsThe Need to Reduce Distribution Costs

(4) (4) The Increased Role and Power of TechnologyThe Increased Role and Power of Technology

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

I. The Search for Sustainable I. The Search for Sustainable Competitive AdvantageCompetitive Advantage

Sustainable Competitive Sustainable Competitive Advantage:Advantage:

A competitive advantage that A competitive advantage that cannot be quickly and easily cannot be quickly and easily

copied by competitorscopied by competitors

A sustainable competitive A sustainable competitive advantage is becoming more advantage is becoming more

difficult to attain through:difficult to attain through: Product StrategyProduct Strategy- rapid technology transfer enables rapid technology transfer enables

competitors to quickly produce similar productscompetitors to quickly produce similar products Pricing StrategyPricing Strategy- global economy allows competitors global economy allows competitors

to find low cost production to match pricesto find low cost production to match prices Promotion StrategyPromotion Strategy- high cost, clutter, and short life high cost, clutter, and short life

promotional campaigns limit competitive advantagepromotional campaigns limit competitive advantage

Competitive Advantage Based Competitive Advantage Based on on

Superior Marketing Channel Superior Marketing Channel Strategy is More Difficult for Strategy is More Difficult for

Competitors to Copy Competitors to Copy Because:Because:

Channel Strategy is Long TermChannel Strategy is Long Term Requires a Channel StructureRequires a Channel Structure Depends on Relationships and PeopleDepends on Relationships and People Requires Effective Interorganizational Requires Effective Interorganizational

Management Management

II. Growing Power of Retailers II. Growing Power of Retailers in Marketing Channelsin Marketing Channels

RetailersRetailers

Retailers....Retailers....

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

than Selling Agents for Suppliersthan Selling Agents for Suppliers Often Operate on Low Price / Low Margin Often Operate on Low Price / Low Margin

ModelModel Operate in Saturated Markets and Fight for Operate in Saturated Markets and Fight for

Market Share Market Share

•Retailers Are Growing LargerRetailers Are Growing Larger

77.6% 22.4%

Top 50Rest

Concentration of Sales Among theConcentration of Sales Among theTop 50 Retail FirmsTop 50 Retail Firms

69%

31%

56%

44%

79%

21%

55%

45%

58%

42%FourLargestFirms

All OtherFirms

65%

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

•Enjoy Substantial Channel PowerEnjoy Substantial Channel Power

Retailer

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

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

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

Power or Dominant Retailers are Power or Dominant Retailers are therefore the therefore the “Gatekeepers” “Gatekeepers” into into

the Consumer Marketplacethe Consumer Marketplace

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

Power Retailers is CrucialPower Retailers is Crucial

III. The Need to Reduce III. The Need to Reduce Distribution CostsDistribution Costs

DistributionDistributionCostsCosts

Distribution Costs Often Account Distribution Costs Often Account for a Significant Percentage of the for a Significant Percentage of the

Final Price of ProductsFinal Price of Products

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

Some Examples...Some Examples...

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%

While terms such as “restructuring”, While terms such as “restructuring”, “flattening out”, “downsizing”, and “flattening out”, “downsizing”, and

“rightsizing” have usually been “rightsizing” have usually been mentioned in the context of mentioned in the context of

corporate organizations, they also corporate organizations, they also apply to Marketing Channels. apply to Marketing Channels.

The latest term.... The latest term....

DisintermediationDisintermediation

IV. Increasing Role and IV. Increasing Role and Usefulness of TechnologyUsefulness of Technology

Technology has the power to Technology has the power to greatly enhance the greatly enhance the

effectiveness and efficiency of effectiveness and efficiency of Marketing Channels and could Marketing Channels and could potentially change the entire potentially change the entire

structure of distribution around structure of distribution around the world.the world.

Some Examples...Some Examples...

The InternetThe Internet Wireless CommunicationsWireless Communications B2C and B2B E-CommerceB2C and B2B E-Commerce Cell PhonesCell Phones Global TelecommunicationsGlobal Telecommunications Robotics & Automated WarehousingRobotics & Automated Warehousing Computerized “Salespeople”Computerized “Salespeople”

Firms that make effective use of Firms that make effective use of these technologies in their channel these technologies in their channel

strategy can gain a strategy can gain a substantialsubstantial competitive advantagecompetitive advantage

CompetitionCompetition

V. The New Stress on Growth V. The New Stress on Growth StrategyStrategy

In American Business Circles In American Business Circles “Growth” “Growth” has Overtaken has Overtaken

“Restructuring” as the #1 Buzzword “Restructuring” as the #1 Buzzword

OutOutReengineeringReengineering

RestructuringRestructuring

DownsizingDownsizing

Flat OrganizationsFlat Organizations

Lean and MeanLean and Mean

In In GrowthGrowth

ExpansionExpansion

New MarketsNew Markets

Market ShareMarket Share

Top Line RevenueTop Line Revenue

QUESTIONQUESTION

In a relatively slow growth In a relatively slow growth economy, how can an individual economy, how can an individual

company selling mature products in company selling mature products in mature markets grow?mature markets grow?

ANSWERANSWER

Share of Mind = Share of MarketShare of Mind = Share of Market

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

SummarySummary

(1) (1) Search For Competitive AdvantageSearch For Competitive Advantage

(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 TechnologyPower and Potential of Technology

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

Downsizing Downsizing

Bottom LineBottom Line

Marketing Channel Strategy Has Marketing Channel Strategy Has Become Critically Important Become Critically Important

For Most BusinessesFor Most Businesses

Strategy in Marketing ChannelsStrategy in Marketing Channels

Channel StrategyChannel Strategy

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

satisfying its customerssatisfying its customers

Basic Strategic QuestionsBasic Strategic Questions(1) (1) What role should distribution play in the firm’s overall What role should distribution play in the firm’s overall

objectives and strategies?objectives and strategies?

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

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

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

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

The Relationship between customer The Relationship between customer satisfaction and the company’s satisfaction and the company’s

marketing mix can be represented as:marketing mix can be represented as:

CCss = f (P = f (P11, P, P22, P, P33, P, P44))

where:where:

CCss= degree of customer satisfaction= degree of customer satisfaction

PP11= product strategy= product strategy

PP22= pricing strategy= pricing strategy

PP33= promotional strategy= promotional strategy

PP44= place (channel strategy)= place (channel strategy)

Distribution Channel Strategy should Distribution Channel Strategy should receive especially heavy emphasis if one or receive especially heavy emphasis if one or

more of the following conditions prevails:more of the following conditions prevails:

Distribution appears to be the most relevant Distribution appears to be the most relevant variable for satisfying customersvariable for satisfying customers

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

High degree of vulnerability exists because of High degree of vulnerability exists because of competitors’ neglect of distributioncompetitors’ neglect of distribution

Distribution channel strategy can foster Distribution channel strategy can foster synergiessynergies

Classic Marketing Channel Classic Marketing Channel Strategies Still Relevant TodayStrategies Still Relevant Today Dual DistributionDual Distribution Exclusive DealingExclusive Dealing Full-Line ForcingFull-Line Forcing Price DifferentiationPrice Differentiation Price MaintenancePrice Maintenance Refusal to DealRefusal to Deal Resale RestrictionsResale Restrictions Tying AgreementsTying Agreements

The Most Basic Questions in the The Most Basic Questions in the Design of Marketing ChannelsDesign of Marketing Channels

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 decision?Who takes part in the buying decision?

Supply Chain ManagementSupply Chain Management

QUESTIONQUESTION

Is this just another “buzzword” Is this just another “buzzword” for logistics - getting the right for logistics - getting the right

product in the right quantity, at product in the right quantity, at the right time and right place?the right time and right place?

ORORIs there something more Is there something more substantive to this term?substantive to this term?

ANSWERANSWER

There There isis something more than something more than semantics here:semantics here:

Supply Chain Management takes a Supply Chain Management takes a broader perspective by viewing broader perspective by viewing

logistics as an integral part of the logistics as an integral part of the marketing channel marketing channel relationshiprelationship

Supply Chain Management Can Supply Chain Management Can Therefore be Defined as:Therefore be Defined as:

A long-term “partnership” among marketing A long-term “partnership” among marketing channel participants aimed at reducing channel participants aimed at reducing

inefficiencies, costs, and redundancies in the inefficiencies, costs, and redundancies in the logistical system in order to provide high levels logistical system in order to provide high levels

of customer serviceof 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

Common Issues in Supply Chain ManagementCommon Issues in Supply Chain Management1. 1. Order Processing TimeOrder Processing Time

2. 2. Order Assembly TimeOrder Assembly Time

3. 3. Delivery TimeDelivery Time

4. 4. Inventory ReliabilityInventory Reliability

5. 5. Order Size ConstraintsOrder Size Constraints

6. 6. Consolidation StipulationConsolidation Stipulation

7. 7. Consistency of DeliveryConsistency of Delivery

8. 8. Frequency of Sales VisitsFrequency of Sales Visits

9. 9. Ordering ConvenienceOrdering Convenience

10. 10. Order Progress InformationOrder Progress Information

11. 11. Inventory Backup During PromotionInventory Backup During Promotion

12. 12. Invoice FormatsInvoice Formats

13. 13. Physical Condition of GoodsPhysical Condition of Goods

14. 14. Claims ResponseClaims Response

15. 15. Billing ProceduresBilling Procedures

16. 16. Average Order Cycle TimeAverage Order Cycle Time

17. 17. Order Cycle Time VariabilityOrder Cycle Time Variability

18. 18. Rush ServiceRush Service

19. 19. Product AvailabilityProduct Availability

20. 20. Competent Technical RepsCompetent Technical Reps

21. 21. Equipment DemonstrationsEquipment Demonstrations

22. 22. Availability of LiteratureAvailability of Literature

23. 23. Accuracy in Filling OrdersAccuracy in Filling Orders

24. 24. Terms of SaleTerms of Sale

25. 25. Protective PackagingProtective Packaging

26. 26. Degree of CooperationDegree of Cooperation

Strategic Alliances and Strategic Alliances and Partnerships in Marketing Partnerships in Marketing

ChannelsChannels

Definition:Definition:

Continuing and mutually supportive Continuing and mutually supportive relationship between the manufacturer and relationship between the manufacturer and its channel members in an effort to provide its channel members in an effort to provide

a more highly motivated team, network, a more highly motivated team, network, and alliance of channel partnersand alliance of channel partners

Traditional “us-against-them” Traditional “us-against-them” mentality is replaced with a new mentality is replaced with a new

cooperative perception of “us” in cooperative perception of “us” in an effective channel partnership an effective channel partnership

or strategic allianceor strategic alliance

Thus, partnerships or strategic Thus, partnerships or strategic alliances go well beyond the ad-alliances go well beyond the ad-

hoc, on-again / off-again hoc, on-again / off-again interactions typical of traditional interactions typical of traditional

relationships among channel relationships among channel membersmembers

Requirements for Partnerships or Requirements for Partnerships or Strategic Alliances in Marketing Strategic Alliances in Marketing

ChannelsChannels(1) (1) Recognition of interdependence of channel Recognition of interdependence of channel

membersmembers

(2) (2) Close cooperation between channel membersClose cooperation between channel members

(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 goalsCoordinated effort focused on common goals

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

Relationship Marketing Relationship Marketing via the Marketing Channelvia the Marketing Channel

Relationship MarketingRelationship Marketing

The practice of building long-term relations The practice of building long-term relations with key parties - customers, suppliers, with key parties - customers, suppliers,

distributors- in order to retain their long-distributors- in order to retain their long-term preference and businessterm preference and business

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

relationship marketingrelationship marketing

Building Relationships with Channel Building Relationships with Channel MembersMembers

Find Out the Needs and Problems of Channel Find Out the Needs and Problems of Channel MembersMembers

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

-research studies of channel members-research studies of channel members

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

-cooperative arrangements-cooperative arrangements

-partnerships and strategic alliances-partnerships and strategic alliances

-distribution programming-distribution programming Provide Leadership to Motivate Channel Members Provide Leadership to Motivate Channel Members

-use power effectively-use power effectively

-recognize causes of conflict-recognize causes of conflict

-resolve conflicts-resolve conflicts

Bases of Power in the Marketing Bases of Power in the Marketing ChannelChannel

Reward PowerReward Power Coercive PowerCoercive Power Legitimate PowerLegitimate Power Referent PowerReferent Power Expert 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

Causes of Marketing Channel Causes of Marketing Channel ConflictConflict

Role IncongruitiesRole Incongruities Resource ScarcitiesResource Scarcities Perceptual DivergenciesPerceptual Divergencies Expectational DifferencesExpectational Differences Decision Domain DisagreementsDecision Domain Disagreements Goal IncompatabilitiesGoal Incompatabilities Communication DifficultiesCommunication Difficulties

Ten Trends in Marketing Channels Ten Trends in Marketing Channels as We Move into the Next Millenniumas We Move into the Next Millennium

1. 1. Growing Emphasis on Marketing Channel Growing Emphasis on Marketing Channel StrategyStrategy

2. 2. More and More Stress on TechnologyMore and More Stress on Technology

3. 3. Focus on Efficiency and Reducing Distribution Focus on Efficiency and Reducing Distribution CostsCosts

4. 4. Shortening and Flattening of Distribution Shortening and Flattening of Distribution Channels Channels (Disintermediation)(Disintermediation)

5. 5. Development of New Types of Intermediaries in Development of New Types of Intermediaries in Channels (Reintermediation)Channels (Reintermediation)

Trends Continued...Trends Continued...

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 Wholesalers (Gatekeepers)(Gatekeepers)

8. 8. Mergers and Acquisitions to Gain Mergers and Acquisitions to Gain Distribution Distribution CloutClout

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

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