The selection of channel members

Marketing Channel Reflection

CHAPTER

Designing Marketing Channels

Lecture 6

Part 2 Developing the Marketing Channel

Learning Objectives 1.  Channel design 2.  Who engages in channel 3.  Channel design paradigm 4.  When to make a channel design decision 5.  Distribution objectives 6.  Distribution tasks 7.  Channel structure decisions 8.  Variables affecting channel design decisions and gap

analysis 9.  Heuristics in channel design 10. Choosing the optimal structure

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Channel Design

Channel Design: Decisions involving the development of new

marketing channels either where

none had previously existed or to

the modification of

existing channels

1

Channel Design

1.  A decision made by the marketer

2.  The creation and modification of channels based on identifying gaps.

3.  The active allocation of distribution tasks in an attempt to develop an efficient structure

4.  The selection of channel members

5.  A strategic tool for gaining a differential advantage

Distinguishing points of the definition include:

Who Engages in Channel Design?

• Producers,

manufacturers, service

providers, franchisors

• Look down the

channel

toward the market

• Look up the

channel

to secure

suppliers

• Look both up

and

down

the channel

Firms Wholesalers Retailers

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Channel Design Paradigm

1.  Recognize the need for channel design decision

7. Select channel members

5. Evaluate relevant variables and Gaps

6. Choose the “best” channel structure

2. Set & coordinate distribution objectives

3. Specify distribution Flow tasks

4. Develop alternative channel structures

3

PHASE 1: RECOGNISE THE NEED FOR A CHANNEL DESIGN

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When to Make a Channel Design Decision

•  Developing a new product or product line

•  Aiming an existing product at a new market

•  Making a major change in some other component of the marketing mix

•  Establishing a new firm

•  Adapting to changing intermediary policies that may inhibit attainment of distribution objectives

4

When to Make a Channel Design Decision

•  Dealing with changes in availability of particular kinds of intermediaries

•  Opening up new geographic marketing areas

•  Facing the occurrence of major environmental changes

•  Meeting the challenge of conflict or other behavioral problems

•  Reviewing and evaluating

PHASE 2: SETTING AND COORDINATING DISTRIBUTION OBJECTIVES

10

Distribution Objectives

Setting distribution objectives

requires knowledge of which,

if any, existing objectives

& strategies may impinge

on these distribution objectives.

5

Setting Explicit Objectives

Dell Computer……… Our growth strategy involves reaching more customers worldwide through new distribution channels such as consumer, retail, expanding our relationships with value added resellers, and augmenting select areas of our business through targeted acquisitions

12

Pharma Vending

13

The Need for Congruency

Firm’s overall

objectives &

strategies

General

marketing objectives & strategies

Pricing

marketing objectives & strategies

Product

marketing objectives & strategies

Promotion marketing

objectives & strategies

Distribution marketing

objectives & strategies

PHASE 3: SPECIFYING DISTRIBUTION FLOW TASKS

15

Distribution Flow Tasks

Outlining distribution flow tasks is specific

and situationally dependent on the firm.

For example: Distribution flow tasks for a

manufacturer of consumer products

differs from those for products sold

in industrial markets.

Distribution tasks are a function of the distribution

objectives and the types of firms involved.

=

6

Channel Flows

•  Specific channel members may specialise in performing one or more flows but may not participate at all in the performance of the other flows.

•  Further it may be tempting to remove a channel member from the channel.

•  Example. HP have a Rep that calls directly on a major corporate account but that same corporate account is also being serviced by a Value Added Reseller.

•  Every flow not only contributes to the production of valued service outputs but is associated with a cost.

Importance of Channel Flows

Distribution channel members such as producers, intermediaries, and consumers assume some costs to perform marketing flows. The basic assumption is that a producer can add or eliminate members of a channel in order to reach the final consumer, but the marketing flows cannot be eliminated.

THE EIGHT GENERIC CHANNEL FLOWS

19

20

MARKETING FLOWS IN CHANNELS

Physical Physical Physical Possession Possession Possession Ownership Ownership Ownership

Promotion Promotion Promotion

Negotiation Negotiation Negotiation Consumers Producers Wholesalers Retailers Industrial Financing Financing Financing and Household Risking Risking Risking

Ordering Ordering Ordering

Payment Payment Payment

Commercial Channel Subsystem

The arrows above show flows of activity in the channel (e.g. physical possession flows from producers to wholesalers to retailers to consumers). Each flow carries a cost. Some examples of costs of various flows are given below:

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MARKETING FLOWS IN CHANNELS (CONTINUED)

Marketing Flow

Cost Represented

Physical possession

Storage and delivery costs

Ownership

Inventory carrying costs

Promotion

Personal selling, advertising, sales promotion, publicity, public relations costs

Negotiation

Time and legal costs

Financing

Credit terms, terms and conditions of sale

Risking

Price guarantees, warranties, insurance, repair, and after-sale service costs

Ordering

Order-processing costs

Payment

Collections, bad debt costs

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Flow to be Performed:

Examples of Intermediaries Who Can Perform Flow:

Physical Possession

Contract warehouse Shipping company (e.g. Federal Express, UPS, air freight) Distributor Retailers (including bricks and mortar, catalog, online)

Ownership

Contract warehouse Distributor Retailers (including bricks and mortar, catalog, online)

Promotion

Distributor Independent sales representative Broker Retailers (including bricks and mortar, catalog, online) Franchisees

Negotiation

Distributor Export Marketing Company Independent sales representative

Financing

Distributor Broker Retailers (including bricks and mortar, catalog, online) Credit card company Banks Franchisees

Risking

Distributor Retailers (including bricks and mortar, catalog, online) Credit card company Franchisees

Ordering

Distributor Independent sales representative Retailers (including bricks and mortar, catalog, online) Franchisees

Payment

Distributor Shipping company (e.g. Schneider) Retailers (including bricks and mortar, catalog, online) Franchisees

MAPPING FROM FLOWS TO BE PERFORMED TO APPROPRIATE INTERMEDIARY CHOICES

Physical Possession - Ownership

•  Owner takes title of goods •  Bears the cost of carry the inventory •  Capital is tied up in product •  Physical possession and ownership commonly move together

•  Exception consignment selling

Promotion

•  Promotional activities operate at – Above and Below the line advertising activity – End-user pull through

•  Selling by an employee •  Outside sales force (brokers and registered investment advisors)

•  Third-party reverse logistics - refurbished products

Negotiation

•  Occurs whenever terms of trade of sale or of the maintenance of an ongoing relationship are discussed and decided.

•  measured in cost of personnel time spent in negotiating

Channel Video – Chinese / Indian Negotiation

Click to play video

http://www.youtube.com/watch?v=f07FDFJf1k4

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Financing

•  Costs are inherent in the terms of sale from one level of the channel to another or

•  The channel to the end-user •  Payment terms, discount for early payment

Channel Video

Getting paid

Click to play video

https://www.youtube.com/watch?v=d1Uvg35icgg

32

Risking

•  Many sources of risking – Long-term contracts lock in distributor to end- user

– No price protection for partners – Vendors try to mitigate their risk on distributors

•  Pass on after sales service •  Limit warranties •  Channel stuffing

Channel Video

Importance of price protection

Click to play video

https://www.youtube.com/watch?v=72N1CPfwCco

35

Channel Video

Channel stuffing

Click to play video

https://www.youtube.com/watch?v=9bNRRa-tb_A

37

Ordering and Payment Flows

•  Does the distributor order from vendor direct?

•  Or orders direct from vendors factory overseas – Quick ship logistics – Automated reordering systems

Channel Video Quick ship logistics

Click to play video

https://www.youtube.com/watch?v=xpqr-m5_hTQ

40

CHAPTER

Why is it important not to perform necessarily high levels of channel flows?

Customising the List of Flows

•  It is important to know when to – Customise channel flows – Combine channel flows – Expand a flow

•  Promotional flow may consist of –  Cost of running a sales force –  Cost of running advertisements –  Cost of running public relations

Who does what channel flows?

•  Crucial once channel flows are described must measure all costs incurred

•  Must reward costly channel flow performance by channel members

•  What channel flows channel members are involve in are not obvious

Describing the current channel with the Efficiency Template

•  It measures the costs borne and value added by channel members in achieving channel performance

•  A practical application of the efficiency model is described on the next slide

The Channel Efficiency Model

•  To reveal how the flows costs are shared among channel members.

•  To explain how members contribute to the added value of the whole chain.

•  To ascertain the flows’ importance to the channel.

•  As a powerful tool to explain the actual channel performance and justify changes that companies should make.

Use of Efficiency Template describes

1.  The types and amounts of work done by each channel member in the performance of channel flows

2.  The importance of each channel flow to the provision of the demanded consumer service outputs.

3.  The resulting share of channel profits that each channel member should reap

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Channel Manager must

Goal •  Minimise cost of running the

distribution channel to preserve profit margins

Challenge •  Ensure enough is spent on

performing the channel flows to guarantee the generation of desired service outputs

•  Poor decisions on how to spend money running the channel will result in low provision of service outputs

•  Competitors take advantage in holes in service output provisions

•  Spending to much will create higher service output costs that are required.

PHASE 4: DEVELOPING ALTERNATIVE CHANNEL STRUCTURES

50

Channel Structure Dimensions

Allocation Alternatives

7

3. Types of

intermediaries at each

level

1. Number of levels in

the channel

2. Intensity at the

various levels

Number of Levels

•  Range from two to five or more •  Number of alternatives is limited to

two or three choices •  Limitations result from the following

factors: ü  Particular industry practices ü  Nature & size of the market ü  Availability of intermediaries

Intensity at the Various Levels

Intensive Selective Exclusive

Many Few One

Intensity Dimension

Numbers of Intermediaries (retail level)

Relationship between the intensity of

distribution dimension & number of retail

intermediaries used in a given market area.

Intensive distribution

•  Means that a brand can be purchased through many of the possible outlets in a trading area (at saturation every possible outlet).

•  More intensive less the manufacturer can influence channel members performing flows

•  Covers many transactional products

Intensive Distribution

The Australian Financial Review: Case Studies with Business News. (2007). McDonald’s :Addressing changing food values (4 ed.) [Case Study]. Sydney, New South Wales :

Selective Distribution

•  Means market coverage in which a product is distributed through a limited number of wholesalers or retailers in a given area

•  Used in retail facilities, where resources or image may have an impact on consumer impression

•  i.e. LVMH, Royal Canin

LVMH AT A GLANCE

World leader in luxury brands. Total 2008 revenue: 17.2 billion euro's. 77,000 employees worldwide. A recent group (created in 1987) that is constantly expanding. An international retail network of more than 2,300 stores.

Royal Canin

• Began in 1996 - Henri Largarde • 18% Market share in Europe • Distribution – sold to breeders • Switched to hypermarkets and was not successful brand not well presented • Early 1990s switched to selling through speciality outlets: garden stores, pet departments as well as pet stores • Result high margins, fast growth and market share

Exclusive Distribution

•  Means a brand can be purchased through one channel partner in a trading area

•  Useful in early stages of distribution evolvement

•  May have limited coverage •  Allows for focus •  Power can shift to exclusive partner •  i.e. Examples of such products include Rolex watches, Gucci

bags, Regal shoes, Celine neckties, and Mark Cross wallets

Ferrari Dealer Network

There are five authorised Ferrari showrooms and after- sales facilities in Australia Many of the authorised network of Ferrari Dealers have enjoyed a lengthy partnership with the Ferrari marquee

Types of Intermediaries

•  Numerous types •  Manager’s emphasis on types of

distribution tasks performed by these intermediaries

•  Watch emerging types –  Electronic online auction firms (eBay) –  Industrial products sold in B2B markets (Chemdex, Converge.com)

PHASE 5: EVALUATING THE VARIABLES THAT IMPACT CHANNEL STRUCTURE AND CONDUCT GAP ANALYSIS

62

Variables Affecting Channel Structure 8

1.  Market Variables 2.  Product Variables 3.  Company Variables

4.  Intermediary Variables 5.  Environmental Variables

6.  Behavioral Variable

Categories of Variables

Market Variables

Market Geography Location, geographical size, & distance from producer

Market Size Number of customers in a market

Market Density Number of buying units

(consumers or industrial firms) per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy

Product Variables

Bulk & Weight

Perishability

Unit Value

Degree of Standardization

Technical versus Nontechnical

Newness

Company Variables

Size The range of options is relative to a firm’s size

Financial The greater the capital, the Capacity lower the dependence on

intermediaries

Managerial Intermediaries are necessary Expertise when managerial experience is lacking

Objectives Marketing & objectives may & Strategies limit use of intermediaries

Intermediary Variables

Availability Availability of intermediaries influences channel structure.

Cost Cost is always a consideration in channel structure.

Services Services that intermediaries offer are closely related to the selection of channel members.

Environmental Variables The impact of environmental forces is

a common reason for making

channel design decisions.

Competitive Forces

Economic Forces

Sociocultural Forces

Technological Forces

Legal Forces

Behavioral Variables

Develop congruent roles for

channel members.

Be aware of available power

bases

Attend to the influence of behavioral problems that can distort communications.

Heuristics in Channel Design 9

Benefit

Fairly simple prescriptions for channel structure

Limitation

Mostly useful as rough guide to decision making

The marketing channel challenge involves…

1.  Understanding gaps in your channel design.

2.  Adjust or re-design 3.  Monitor performance of channel

members

FIVE STEP CHANNEL ANALYSIS

Step 1 - Segmentation

•  Define and profile service output demands (SOD) by segment. – Value added services performed by your channel members

•  Identify environmental characteristics and constraints – Limited infrastructure, government constraints, economic, technological

Step 2- Positioning

•  Position yourself in the channel (know your strengths / weaknesses)

•  Which segments are a good target (channel resources are limited) – Segments must be profitable, accessible, actionable and measurable

Step 3 - Targeting •  Knowing what segments to ignore in one’s channel design and where to apply managements effort.

•  Focus on key segments that reap the profitable sales. •  Be aware of

– Managerial bounds –  Environmental bounds –  Competitive benchmarks

Step 4 – Establish new or refine existing channels

•  Gap analysis – Demand side – Supply side

Gap Analysis

•  What gaps in the service outputs of the ideal, existing, and management bounded distribution systems should the firm try to eliminate?

•  Figure 1, 2 & 3 identifies three situations that require corrective action. Source: (Stern, Sturdivant and Getz, Accomplishing Marketing Channel Change: Paths and Pitfalls, 1987)

Figure 1 Gap Analysis in Distribution System Design

Management Bounded Distribution System

Ideal Distribution System

Existing Distribution System

Situation A: Strategic Fit

Interpretation: Any distribution related problems result from poor execution, not poor design of the system.

Necessary Actions: Sharpen performance; maintain existing system.

Figure 2 Gap Analysis in Distribution System Design

Management Bounded System

Existing Distribution System

Ideal Distribution System

Interpretation: Management has designed a system which reflects its needs, but has given inadequate attention to customer needs.

Necessary Actions: Investigate validity of management constraints and objectives, and analyse customer requirements and expectations.

Situation B: Partial Fit

Gap

Figure 3 Gap Analysis in Distribution System Design

Existing Distribution System

Management Bounded Distribution System

Interpretation: End-user satisfaction can be improved by improving service outputs.

Preferred Actions: Examine certain management criteria to assess the possibility of bringing the existing systems even closer to the ideal distribution system.

Situation C: Complete Misfit

Ideal Distribution System

Gap Gap

Step 5 – Channel Implementation

•  Communicate changes and improvements •  Identifying power sources •  Identifying channel conflicts and resolve •  Coordinate, Control and manage relationships with channel partners.

PHASE 6: CHOOSING THE “BEST” CHANNEL STRUCTURE

82

Choosing an Optimal Channel Structure

Why is choosing an optimal channel structure not possible?

1.  Management is incapable of knowing all

possible alternatives.

2. Precise methods for calculating the exact payoffs associated with each

alternative structures do not exist.

Techniques exist for developing more exact methods.

10

BUT

Approaches for Choosing Channel Structure

•  “Characteristics of Goods & Parallel Systems” Approach

•  Financial Approach

•  Transaction Flow Cost Analysis Approach

•  Management Science Approaches

•  Judgmental-Heuristic Approach

PHASE 7: CHANNEL MEMBER SELECTION

85

Channel Member Selection

Channel member selection may be to replace channel

members that have left…

OR

…to obtain greater coverage.

1 Channel member selection – the 7th

and final phase of channel design

Selection may of may not be the result of channel design

Selection & Distribution Intensity

The greater the intensity of distribution…

…the less the emphasis on selection

2

Summary •  Channel design refers to those decisions associated with marketing channels and the modifications of existing channels.

•  Channel design paradigm can be seen as a seven phase process.

•  Understanding channel flow and the efficiency template help understand allocation of channel flows and cost of channel members performing those flows.

•  Gap analysis is a useful in modifying and improving channel efficiency and performance.