CAM 312: MARKETING CHANNELTOPIC 1: NATURE OF MARKETING CHANNELS

The meaning of marketing channel

It may be defined as the external contractual organizations

that management operates to achieve its distribution

objectives, Rosenblour (2007).

Four terms in the definition should be especially noted;

external, contractual organization, operates, distribution

objectives.

External – the term means that marketing channel exist

outside the organization. Management of marketing channels

therefore involves the use of inter organizational

management (managing more than one firm) rather than

intraorganizational management (managing one firm)

Contractual organization; - Refers to these firms or parties

who are involved in negotiating functions as a product or

service moves from the producer to its ultimate user.

Negotiating functions consist of buying, selling and

transferring titles to products or services. Consequently

only those firms or parties who engage in these functions

are members of marketing channels. (Other firms usually

referred to as facilitating agencies) such as transportation

companies, public warehouses, banks, insurance companies,

advertising agencies and the like, which perform functions

other than negotiating are exclude.

Operates; - This term suggest involvement by management in

the affairs of the channel. This involvement may range from

the initial development of channel structure all the way to

day – to day management of the channel. By operating the

channel, management is acting to avoid unwilling control of

its actors by the channel. However, an organization may not

be able to have total or even substantial control of the

channel.

Distribution objection; - The fourth key term in the

definition means that management has certain distribution

goals in mind. The marketing channels exist as a means for

reaching these. The structure and management of the

marketing channel are thus in part a function of the firms

distribution. As these objectives change, variation in the

external contractual organization and the way management

attempts to operates it can also be expected to change.

Importance of marketing channels

There are a number of developments that underlie the keen

interest being paid to marketing channels as a strategic

marketing tool. Below are the four main developments;

1. Explosion of information technology and E- Commerce

By the late 1990’s internet- based electronic Commerce (E-

Commerce) had become the most talked a bout business

phenomenon of the twentieth Century. The new paradigm of

information technology was creating a ‘ new economy’ based

on E- Commerce.

Hundreds of thousands of producers would be connected

directly with millions of consumers on a global scale

without with out the help of the middlemen, who would be

disinter mediated from marketing channel. Disintermediation

did not go on for long before reinter mediation , such as

yahoo! eBay, and Autobytel along with cyber retailers such

as Amazon.com – emerged to connect buyers and sellers via

the internet.

2. Difficulty in Gaining sustainable competitive advantage

In recent years, it has become fair more difficult for

companies to attain such an advantage through product,

price, and promotion strategies. With regard to product

strategy, rapid technology transfer from one company to

another and global competition have made much easier for

competitors to achieve parity in product design, features

and quality. The a ability of any given company to compete

over the long run by relying on its products being better

or different from the other organizations has become

exceedingly difficult to sustain.

Gaining sustainable competitive advantage via pricing

strength in today’s global economy is even less feasible

than through products strategy. The ability of more time to

operate production feasibilities all over the world has

created fairer price competition in many different product

categories and, to an increasing extent, in services as

well. Consequently a company whose strategy emphasizes lower

prices than competitors is not likely to hold on to that

advantage for long because another company manufacturing the

same products somewhere around the globe is virtually

certain to match or undercut the price.

Gaining a sustainable competitive advantage. The massive

barrage of advertising and other forms of promotion to which

consumers are exposed on a daily basis has created enormous

clutter, which drastically reduces the impact of promotional

messages. Hence, the effects of even the most clever and

carefully crafted promotional messages are short-lived as

literally thousands of messages knock each other out of

target audiences’ minds. So, holding on to a competitive

advantage and gained through promotion has become all but

impossible today in the face of such intense clutter.

The fourth p in the marketing mix, place, or the marketing

channel strategy does greater potential for gaining

competitive advantage than the other because it is more

difficult for competitors to copy.

III Growing power of distributors

Over the past two decades, clout has shifted from the

producers of goods to distributors of goods. This shift is

economics power has been especially noticeable at the retail

level of marketing channels, where giant mass merchandisers

such as wool-mart have become dominant players. These power

retailer account for large shares of the commodity lines

which they deal and hence they control access to market

place.

From he manufactures perspective, these powerful retailers

play the role of “gatekeepers” into consumer markets. As

gatekeepers, they act as buying agents for their customers

rather than as selling agents for manufactures. Moist also

operative on a low-margin /low price format and have emerged

as sophisticated marketers and fierce competitors that make

tough demands on the manufacture who supply them. As a

result of the development, the need for producers and

manufactures to develop an effective marketing channel

strategy for dealing with these powerful and dominant

retailers has become stronger than every.

IV The need to reduce distribution cost

Distribution costs often account for significant percentage

of the finale price of products. Sometimes distribution

costs are higher than the manufacturing costs or the costs

of raw materials and component parts.

Over the past decades, a massive effort by companies to

drive sown costs of manufacturing and internal operations

has taken place. Programs such as restructuring and

reengineering and the flattening out of organization has all

been driven by the quest to reduce costs.

This massive effort to squeeze out costs is now being

extended to the marketing channels that form use to reach

their customers thus the new frontier for cost control in

the twenty first century will be marketing channels. But in

order to reduce the costs of distribution while providing

equal or superior product availability to customers, forms

will need to focus much more attentions on marketing

channels structure and management than they have in the

past.

THE ELEMENTS OF SUCCESSFUL MARKETING CHANNELS

To achieve success in a competitive arena, members must pool

individual resources to achieve collective goals through a

connected system. This connected system must be flexible

enough to accommodate changes in the environment. For a

successful marketing channel, the following elements must be

present.

Pooled Resources

A Marketing Channel operates as a team, sharing resources

and risks to move products from their point-of-origin to

their point of final consumption.

Each channel member is dependant on all other members in the

marketing channel. For a channel to exist, the behaviour of

one channel member must influence the behaviour of other

members. However, it is unusual for each channel member to

perform the same functions in the same quantity.

Collective Goals

A sense of shared purpose helps unite organisations within

market channels, particularly when organisations sense a

chance to win a critical competition for market share. These

connections could be of short duration or could last

decades.

Channel members must share one or more common goals to

ensure a seamless flow of goods and services. These shared

objectives are complex and are ideally linked by long-term

objectives.

The purpose shared by the members of the organisation is

reflected in the organisation’s mission statement. A mission

statement is an organisation’s strategic charter – a public

declaration of why it exists. It proclaims :

- an organisation’s goals

- the procedures to be employed in pursuit of these goals

- how the organisation intends to satisfy the needs of

its internal and external customers.

Connected System

Organisations cannot exist without markets. All business

competition emerges within marketing channels, and the

success or failure of all individual enterprise is

ultimately decided there. Channel members regulate the flows

of goods and services in the market place.

Marketing channels feature an established set of norms which

keep the exchange together. These norms reflect the rules of

marketplace competition. Channel members engage in a wide

variety of interactions in many directions.

Flexibility

Marketing channels must be flexible systems in order to be

successful. They may be thought of as ecological systems

because of the unique, ecological – like connections that

exist among the participants within a marketing channel. The

organisation and the persons involved in channel flows must

be sufficiently connected to permit the system to operate as

a whole, but the bond they share must be loose enough to

allow for components to be replaced or added.

Organisations can enter or exit channel systems with

relative ease. Therefore, channel members are free to accept

or reject these norms. Also, channel members are likely to

perform their functions simultaneously.

TOPIC 2 Channel strategy versus logistics management

Bolt Channel strategy and logistics management fits under

the distribution variable of the marketing mix. Channel

strategy and logistics management are closely related, but

channel strategy is a much broader and more basic component

than is logistics management. Channel strategy is concerned

with the entire process of setting up and operating the

contractual organization that is responsible for meeting the

firm’s distribution objectives. Logistics management, on

the other hand. Is more narrowly focused on pounding product

availability at the appropriate times and places in the

marketing channel. Usually, channel strategy must already

be formulated before logistics management can even be

considered. This is not to argue that logistics is not an

important part of distribution strategy. Effective

logistics management remains vital to the success of the

forms overall distribution strategy.

LOGISTICS

In both vertical and horizontal marketing systems,

systemised information contributes to the efficient flow of

goods and services from the point-of-origin to the point-of-

consumption. This process of regulation begins with customer

service and extends to the procurement, handling and

processing of resources aimed at delivering customer

satisfaction.

Logistics is a way of systemizing information to facilitate

the efficient and cost-effective flow of goods and services

to produce customer satisfaction. Each member in the supply

chain must be involved in logistics activities. Logistics

flows may begin with the supplier/manufacturer

relationships, but efficient logistics activities are needed

throughout the marketing channel.

Logistics management is defined as :

The process of planning, implementing and controlling the

efficient, cost-effective flow and storage of raw materials,

in-process inventory, finished goods, and related

information from point-of-origin to point-of-consumption for

the purpose of conforming to customer requirements.

Three universal themes in logistics management include :

- Information drives the flow of goods and services

- Control over marketing channels can be achieved (from a

distance) on the basis of efficiency and cost

containment in resource flows.

- In marketing channels, resources are recast through an

integrated system of technology, information and

communication.

Effective logistics management can help a firm create

strategic competitive advantages. Properly managed

logistical services can add value to customers.

Manufacturers, wholesalers and retailers often distinguish

themselves by the effectiveness with which they provide

bundles of services. These services include billing,

forecasting demand, handling returns, inventory management,

special packaging, transportation, and warehousing and

storage functions.

Measuring logistics performance

One common performance measure is profitability. However,

isolating the costs and returns associated with the flow of

goods and services from the point-of-origin to the point-of-

consumption is extremely difficult. Different channel

members bear different costs, depending upon the functions

they perform and the services they provide.

Another performance measure is the service quality index

(SQI), a composite measure of a firm’s service capabilities,

consisting of on-time performance, transit time, rates, cost

of damaged goods and the like. The SQI offers a way to

account for the cost/revenue trade-off when logistics

performance is measured.

Customer responsiveness is an effective way of evaluating

logistics performance. Customer responsiveness reflects a

channel member’s ability to adapt to its partner’s changing

needs. It captures customers’ perceptions of the logistics

quality provided by a supplying firm.

Four procedures help customers identify logistics needs :

(i) External Audits : An external audit identifies the

service variables that the firm’s customers value most.

They can involve surveys or personal interviews with

the firm’s current customers. Customers can be allowed

to provide information freely. This provides greater

assurance that no critical service attribute is left

out. Customers should then evaluate how well the major

vendors in the market address each service available.

(ii) Internal Audits : An internal audit is a comprehensive

evaluation of how well firms believe their current

logistics practices satisfy important service

variables. Internal audits identify gaps between a

firm’s current logistics practices and its customer’s

service quality expectations.

(iii) Customer perceptions evaluations : This involves

obtaining specific feedback on customer service

quality.

(iv) Competitive advantage evaluations : Here a firm

evaluates itself in the light of its competitors.

LOGISTICS AND CHANNEL MANAGEMENT

Logistics systems are frequently described in terms of

delivering the right product to the right place at the right

time in the right condition for the right cost.

Goals of channel systems include :

- Securing greater market coverage

- Deliver customer service

- Ensure the right product characteristics

- Achieve cost containment

Attaining Market Coverage

The right place is where the product needs to be to satisfy

customer expectations. Logistics provides firms with an

opportunity to capture market share by matching product

availability with market demand.

Delivering Customer Service

Firms can earn a strategic advantage by developing strong

personal relationships with other channel members. Such

firms will be better positioned to deliver the right product

at the right time.

Ensuring the Right Product Characteristics

Bringing products to customers in the right condition and in

the right amount are critical logistics functions. Today’s

products are extremely customised to meet the exchange

partner’s needs. Customisation is sometimes accomplished

through modifying productive packaging or actual product

specifications.

Achieving Cost Containment

The right cost is a market-derived assessment. Customers

eventually determine how much they are willing to pay to

have a channel function performed. Yet, costs are not

equally distributed throughout the supply chain. The notion

of who will bear the costs of performing logistics functions

is a major consideration in channels management.

RELATIONSHIP LOGISTICS MODEL

The RLM has five components :

(i) Systemised Information

Systemised information involves the communication of the

firm, market and industry data between exchange partners.

This information promotes the efficient flow of information

from the origin to the destination. Relationship logistics

requires that channel members attain high levels of

coordination with one another. This coordination is achieved

through information exchange.

(ii) Logistics Inputs

Logistics inputs are human and capital investments in the

flow of goods and services through the marketing channel.

Depending upon the logistics activities performed, these

inputs differ among channel members. Relationship logistics

requires that each channel member commits to the resources

agreed upon at the beginning of the exchange relationship.

- Natural Resources

- Human Resources

- Financial Resources

(iii) Logistics Goals

Logistics goals are objectives that guide the logistics

activities. When a relationship logistics orientation

prevails, channel members share complementary or collective

goals in areas like market coverage and customer

satisfaction. Outcomes that are perceived as equitable by

all channel members are then more likely to be achieved.

(iv) Logistics Mediators

Logistics mediators are the activities that channel members

must perform to ensure smooth, efficient and cost-effective

flow of goods and services through marketing channels.

Logistics mediators are necessary to transform raw materials

into finished goods. These activities directly shape the

nature of exchange relationships between channel members.

- Inventory Management

- Transportation

- Warehousing and Material Building

- Purchasing

- Packaging

(v) Logistics Outputs

Logistics outputs are outcomes – competitive advantage,

efficiencies, and customer satisfaction – that result

directly from channel members’ performance in logistics

systems. In relationship logistics, outcomes should be fair

for each channel member.

- Competitive Advantage

- Efficiency

- Customer Satisfaction

Quiz

1. Why have marketing channels enjoyed increased attentionin marketing as a strategic area of competing in themarket?

2. What is the difference between channel strategy andlogistics management?

TOPIC 3: INTERMEDIARIES

Intermediaries are independent businesses that assistproducers and manufacturers (and final users) in theperformance of negotiatory functions and other distributiontasks. Intermediaries thus participate in the negotiationand/or ownership flows. Intermediaries basically operate attwo levels: wholesale and retail.

Wholesalers

Wholesalers consist of businesses that are engaged inselling goods for resale or businesses use to retail,industrial, commercial, institutional, professional, oragricultural firms, as well as to other wholesalers. Alsoincluded are firms acting as agents or brokers in eitherbuying goods for or selling them to such customers.

Types and kinds of wholesalers

The most comprehensive and commonly used classification ofwholesalers is that used by the census of wholesale trade,published by the U.S Department of commerce every fiveyears, which breaks them down into three major types:

(a) Merchant wholesalers(b) Agents, brokers and commission merchants(c) Manufacturers’ sales branches and offices.

(a) Merchant wholesalersThese are firms engaged primarily in buying, takingtitle to, usually storing, and physically handlingproducts in relatively very large quantities and thenreselling the products in smaller quantities toretailers to industrial, commercial, or institutionalconcerns and to other wholesalers. They go under manydifferent names, such as wholesaler, jobber,distributor, industrial distributor, supply house,assembler, importer, exporter and others.

(b) Agents, brokers and commission merchantsThese are also independent middlemen who do not for allor most of their businesses, take title to the goods inwhich they deal, but who are actively involved innegotiatory functions of buying and selling whileacting on behalf of their clients. They are usuallycompensated in the form of commission on sales andpurchases. Some of the more common types are known intheir industries as manufacturer’s agents, commission

merchants, brokers, selling agents and import andexport agents.

(c) Manufacturers, sales branches and officesThese are owned and operated by manufacturers but arephysically separated from manufacturing plants. Theyare used primarily for purpose of distributingmanufacturers own products at wholesalers. Some havewarehousing facilities where inventories aremaintained, while others are merely sales offices,some of them also wholesale allied and supplementaryproducts purchased from other manufacturers.

Structure and Trends in Wholesaling

Distribution tasks performed by merchant wholesalers:Merchant wholesalers serve manufacturers as well asretailers and other customers. They are survived asintermediaries in the marketing channel because asspecialists in the performance of distribution tasks, theycan operate at high levels of effectiveness and efficiency.Modern, well-managed merchant wholesalers are especiallywell suited for performing the following types ofdistribution tasks for producers and manufacturers.

1. Providing market coverage2. Making sales contacts3. Holding inventory4. Processing orders5. Gathering market information6. Offering customer support

In addition to performing the six distribution tasks formanufacturers, as discussed in the preceding paragraphs,merchant wholesalers are equally well suited to perform thefollowing distribution tasks for their customers:

1. Assuring product availability2. Promoting customer service

3. Extending credit and financial assistance4. Offering assortment convenience5. Breaking truck6. Helping customers with advice and technical support

Retail Intermediaries

Retailers consists of business firms engaged primarily inselling merchandise for personal or household consumptionand pending services incidental to the sale of goods.Retailers comprise an extremely complex and diverseconglomeration. They range in size from a small kiosk togrant merchandise chains such as Wal-Mart. Methods ofoperation run from minimum service to elaborate operationswith magnificent architecture in grand shopping malls. Thecategory includes store retailers as well as non-storeretailers such as mail-order firms, direct selling (in-time)retailers. TV shopping show retailers, and retailersoperating on the internet. There are specially retailers,broad line department store retailers, giant superstoreretailers, “wholesale” club retailers and factory outletretailers as well as global, natural, regional and localretailers. The list can go on and on.

Retailers growing power in marketing channels

The power and influence of retailers in marketing channelshave been growing. This trend follows three majordevelopments:

(i) Increase in size and buying power(ii) Application of advanced technologies(iii) Use of modern marketing strategies

The size of many retailers is increasing due to growth aswell as to mergers, acquisitions and buyouts. Manyretailers are big businesses. Since size translates into

power, their capacity to influence the actions of otherchannel members also becomes greater. Most of the supplierswho supply Wal-Mart for example are considerably smallerthan Wal-Mart and are hardly in a position to exert asignificant influence on Wal-Mart operating policies. Onthe contrary, because of Wal-Mart’s huge size and buyingpower, it is in a position to exert considerable influenceon its suppliers. Indeed in many cases Wal-Mart and othergiant retailers can literally dictate to manufacturers theterms of sale they want.

To sum up, retailers in the United States have become muchlarger and more concentrated, more technologically adept,and more sophisticated marketers. As a result, they havebecome far more powerful members of marketing channels andindeed have come to dominate many of the marketing channelsin which they participate. In short, retailers are now the“gate keepers” into consumer markets.

Distribution tasks performed by retailers

The role of the retailer in the distribution channel,regardless of his size or type, is to interpret the demandsof his customers and to find out and stock the goods thesecustomers want, when they want them, and in the way theywant them. This adds up to having the right assortment atthe time customers are ready to buy. We may speedy thedistribution tasks for which retailers are especially wellsuited as follows:

(i) Offering manpower and physical facilities that enableproducts/manufacturers and wholesalers to have manypoints of contact with consumers close to their placesof residence.

(ii) Providing personal selling, advertising, and display toaid in selling suppliers products.

(iii) Interpreting consumer demand and relaying thisinformation back through the channel.

(iv) Dividing large quantities into consumer-sized lots,thereby providing economies for supply (by acceptingrelatively large shipments) and convenience forconsumers.

(v) Offering storage so that suppliers can have widelydispersed inventories of their products at low cost andenabling consumers to have close access to the productsof producers/manufacturers and wholesalers.

(vi) Removing substantial risk from theproducts/manufacturers (or wholesalers) by ordering andaccepting delivery in advance of the reason.

Quiz

1. The coverage size of retail units (as measured by salesvolume) has been increasing. What are some of theimplications of the trend for channel management inproducing and manufacturing firms?

2. Discuss retailers’ growing power in the marketingchannel in terms of the possible implications forchannel management.

3. Wrigley is the worlds leading manufacturer of chewinggum, producing literally millions of packages of gumevery day. Its manufacturing technology for producinggum is state of the art, and it’s a large financiallystrong company. It sells its products to millions ofgum-chewing consumers all other the United States andmany other countries around the world. Still, Wrigleyhas never attempted to sell its chewing gum directly toconsumers, but instead uses a wide variety ofintermediaries at the wholesale and retail levels.Explain the underlying economies of the company’spolicy.

TOPIC 4 : CONVENTIONAL MARKETING SYSTEMS

Conventional Marketing Channels as Organisational Teams

Conventional channel systems are loosely aligned teams of

organisations designed to bridge the gaps between producers

and consumers. They are perhaps the most difficult tyoe of

marketing team to assemble and to make work effectively.

Each organisation in a conventional organisational team is

something of a functional specialist. But for conventional

channels to succeed, each member still must perform as part

of a system, These systems must be properly designed to

achieve the continuity that channel members need to convert

their special skills into a successful team performance. For

this to happen, channel organisations have to agree with

what results are being sought through the channel. Channel

members must also define their purpose, core competencies,

system of rewards and punishments, devices of conflict

resolution and behavioural norms. Because they require years

to develop, sound manufacturer – intermediary – end user

linkages are often barriers to competitive entry.

Conventional Marketing Channels : Issues and Answers

What is Channel Design ?

Channel design refers to those decisions associated with the

formation of new marketing channel or the alteration of

existing channels. Channel design should be viewed as a

strategic decision because a properly executed channel

design can provide a differential advantage in the

marketplace.

Sustainable Competitive Advantages allow firms to gain long-

term market advantages relative to their competitors.

Why are Channel Design decisions critical ?

The type of channel a producer chooses directly influences

all of its other marketing decisions. Promotional decisions

depend in part, on how much training or motivation their

intermediaries or retailers need. Channel design decisions

typically involve relatively long-term commitments to other

organisations and to the particular markets those channel

members serve.

Channel design decisions are also critical because a channel

system is the key external source to many manufacturers.

Channel design decisions represent a commitment to a set of

policies and procedures. Because channel design decisions

are sometimes easier to get into than to get out of, channel

managers should design channels with a forward view based on

the likely shape of tomorrow’s market.

How do Marketing Functions Factor into The Channel Design

decision?

Marketing functions performed by channel members in order in

which they would normally arise in an automative

distribution channel are :

(i) Information : The accumulation and distribution of

information about current and potential customers,

competitors, and others in the marketing environment.

(ii) Promotion : The construction and distribution of

persuasive and/or informative communications designed

to attract buyers.

(iii) Negotiation : The means by which final agreements

on price and other terms (financing, features etc) is

reached so that transfer of ownership and possession

can be completed.

(iv) Ordering : The communication of an intention to

purchase by end-users through the channel members to

the producers.

(v) Financing : The procurement and allocation of funds

required to finance automative inventories at the

channels different levels.

(vi) Risk-taking : The bearing of the risk associated with

carrying out channel work.

(vii) Possession : The successive stages by which the

storage and the movement of physical products from the

raw materials to final customers occurs.

(viii) Billing : The forward movement of a detailed list

of goods sold or services provided, together with the

charges and the terms.

(ix) Payment : In response to invoices received, payments

involves the means by which buyers pay their bills

through financial institutions to sellers.

(x) Title : The actual transfer of ownership from one

organisation to another, or to the final consumer.

Certain channel functions move forward (promotion,

possession, billing and title), while others move backwards

(ordering and movement). Some functions move up and down the

channel (information, negotiation, financing and risk

taking).

The 10 functions listed above share the following

characteristics :

- They can be performed better through specialisation.

- They can be shifted among channel members

- They invariably use someone’s resources

If the performance functions are shifted, some or all of the

associated costs are also shifted. The total costs and

profit margins demanded by each channel member are reflected

in the final buyer’s cost price.

Channel functions cannot be eliminated – they can only be

shifted from one channel member to another. Thus, the key

question in the issue of channel design is “Who will perform

these functions?” The answer rests on relative efficiency

and relative effectiveness.

The process by which alternative channel designs are

evaluated in terms of their ability to perform a function

with minimum expenditure of effort or expense is called a

Channel Efficiency Analysis.

A Channel Effectiveness Analysis considers the strategic fit

of a channel design with the channel member’s overall

marketing strategy. Effectiveness relates to a channel

design’s ability to perform competently. The evaluation of a

channel design system effectiveness involves longer time

frames than it efficiency evaluation analysis.

Two basic types of intermediaries – those that take title to

the goods (resellers) and those who do not (agents) are

available to perform channel functions.

When is it time to Design or Redesign a Channel?

- when a new firm is established

- when the organisation develops a new product or product

line

- when the organisation decides to target a new market

- when existing channel members change their policies or

fail to perform as

expectedor engage in practices that cause conflict

- external environmental changes, like political,

economic, competitive, sociocultural, technological,

etc might also trigger the need to redesign a

distribution channel

MAKING THE CHANNEL DESIGN DECISION

New organisations often have smaller operations within a

restricted market area. Because smaller firms usually have

restricted capital resources, they usually use existing

intermediaries. Further, the number of intermediaries in a

given local market is frequently small, therefore, deciding

on a convenient channel design in such an environment is no

problem at all.

Larger firms, on the other hand, tend to use different kinds

of channels in different markets.

Large or small, an organisation’s distribution channel may

evolve in response to a SWOT analysis, an analysis of the

companies’ strengths, weaknesses, opportunities and threats

present in the relevant market environment. Information

relating to a channel member’s profitability, sales volume,

brand associations, product portfolios and lifecycles, and

relative costs should be evaluated in SWOT analysis. This

analysis should likewise consider an organisation’s

employee/managerial attitudes, performance and capabilities

along with its current and past marketing strategies. In

addition, a SWOT analysis should consider key market success

factors, and the market’s attractiveness to new entrants,

cost structures, and barriers to entry. Finally,

technological issues, key societal/cultural trends and

developments, and competitors’ strengths and weaknesses

should be evaluated.

Channel Design Options

Channel designs can vary along three dimensions :

- Number of levels present in the channel

- Number of intermediaries operating at various levels

- Types of intermediaries used at each level

Number of Levels in the Channel

Each intermediary that performs a function necessary to

convey a good service closer to the final users represents a

channel level. Since the producer and the final user also

perform certain functions, they are part of any channel

design. A channel’s length is described by the number of

intermediary levels in the channel other than the producer

and the user that it contains.

A zero level channel or direct marketing channel exists when

a producer sells directly to the final user. In consumer

channels, door-to-door selling, mail order catalogues,

telemarketing, or manufacturer-owned retail outlets, all

represent zero-channel levels.

One level channel designs feature one channel intermediary,

such as a retailer who buys directly from a producer.

Two-level channel designs feature some combinations of two

selling intermediaries , such as a wholesaler and a

retailer.

Three-level channel designs feature some combinations of

three intermediaries, such as a wholesaler, agent, or a

retailer.

Consumer channel lengths rarely extend beyond four levels.

In zero-level industrial channels, producers use their

salesforce to market directly to industrial consumers.

However the same salesforce may also market to industrial

distributors who then sell to final industry users. Or,

producers can sell directly to industrial users through

manufacturer’s representatives or use those reps to market

to industrial distributors.

While channels usually describe a forward movement of goods,

backward flowing channels also exist. In these reverse

channels, goods and materials flow from end-users backwards

to production centres for use as cost-effective inputs.

Reverse channels accommodate backward flows for used goods

such as homes, computers, automobiles, and commercial

aircrafts.

Number of Intermediaries at each level

Three basic choices are available :

(i) Intensive Distribution : In this design, producers

distribute through as many outlets as possible. The

decision of whether to use intensive distribution

depends on the nature of the product and the consumer

characteristics and the level of control desired by the

channel designers. When consumers demand location

convenience or when a product is low involvement,

producers offer a great intensity of distribution.

Convenience-oriented consumer goods, such as snack

foods, gasoline or razors are usually distributed in

this fashion.

(ii) Exclusive Distribution : This places limits on the

number of intermediaries operating at any given channel

level. Exclusive distribution is used when producers

want to retain control over the quality of service

levels provided and involves dealers agreeing to not

carrying competitive brands. Intermediaries who enter

into exclusive distribution channels are likely to be

relationship-oriented. By entering exclusive

arrangements, producers hope to secure more aggressive

and knowledgeable sales efforts. The image of products

distributed in this manner is typically enhanced.

Higher mark-ups follow. Most new automobiles, certain

major appliances, and a few clothing lines are

distributed through exclusive distribution channels.

(iii) Selective Distribution : This distribution

strategy lies between the two extremes. In this case,

more than one but fewer than all available

intermediaries are used. Manufacturers do not have to

spread their limited resources over too many outlets,

including many that are possibly marginal. Better

relationships with intermediaries who are selected can

be developed and producers can logically expect better-

than-average marketing efforts. Manufacturers can also

gain sufficient marketing coverage with more control

and less cost than intensive distribution. Downstream

intermediaries benefit from the opportunity to market

somewhat more exclusive offerings.

Manufacturers often face a decision of whether to move from

exclusive or selective distribution to intensive

distribution to increase market coverage and sales. Such a

move may help short-term performance while actually

diminishing long-term prospects because this may adversely

affect the degree of control the firm exercises over its

display arrangements, service levels, and pricing policies.

If a price war ensues, buyers would attach less prestige to

the brands.

Types of Intermediaries at Each Level

Several intermediary options are available ;

(i) Manufacturer’s Salesforce : Sales people could be

assigned to exclusive territories and charged with the

responsibilty of contacting all prospects in the

geographic area. Or, the firm could develop separate

salesforces that specialise in calling on different

industry scetors. Members of a manufacturer’s

salesforce perform the promotion function. They are

employees and are paid a salary/commission plus

benefits for performing this function.

(ii) Manufacturer’s Representatives : The firm can enter

into a contractual agreement with existing

manufacturer’s representatives who currently do

business in the targeted geographic regions or with the

targeted industries. These reps would be assigned

responsibility and control over the marketing of the

product. Manufacturer’s reps are intermediaries who

primarily perform the promotion function. They act as

agents for manufacturers, and receive a commission for

their services.

(iii) Industrial Distributors : The firm can also seek

out prominent distributors that operate in the

different regions or end-user industries. The

distributors would buy the product for resell. In turn,

the firm would probably have to grant these industrial

distributors exclusive territorial distribution rights

and provide them with acceptable margins. The firm

would also be expected to provide these distributors

with product training and promotional support.

Industrial distributors are intermediaries who take

title to the product, and who typically perform

promotional, informational, negotiation, risk-taking

and possession functions. They recover costs of

performing these functions by making profits on

whatever price the market will bear and the unit

volumes that can be sold to downstream buyers.

Companies seek out innovative intermediaries. Sometimes

firms pursue unconventional channels because of problems

associated with more traditional channels.

The experiences of manufacturers who have gone through the

process of starting their own salesforces from scratch

suggest that the key to success lies in careful preparation.

It is essential that the entire sales programme, including

hiring, policies, training, operating procedures, and

compensation be mapped out before the first recruit is

contacted, in order to avoid indecision during the

transition stage.

Evaluating Channel design Alternatives

Channel design alternatives must be evaluated on three

criterai :

- Expected sales and costs

- Control and resources

- Flexibility

Expected Sales and Costs

- Which intermediary option will produce more sales?

Most marketers believe usually corporate sales persons sell

more. Company salespeople must rely entirely on their own

products to succeed. Naturally, they should be better

trained to sell those products. Moreover, company

salesforce should be more business-oriented because their

success ultimately depends on the company’s success.

Finally, customers may prefer to deal directly with the

manufacturers.

Still, the sales agency may sell more. Depending upon the

commission structure involved, the agency’s representatives

may well be as aggressive as a company’s direct salesforce.

Also, customers may prefer dealing with sales agents who

represent several producers, rather than corporate

salespeople who represent only one. Finally, the agency’s

reps presumable have extensive, longstanding relationships

with and knowledge of the target market.

A third factor to be considered is that often, resellers

have little interest in selling unknown products and

therefore the firm may have no choice than to use a company-

owned salesforce.

- What are the relative costs of selling different

amounts through the two intermediaries?

The costs of using a manufacturer’s representatives rise

more quickly than the company’s salesforce. This is because,

while the fixed costs of using a sales agency are always

lower, costs increase faster because sales agents get higher

commissions than corporate reps. At the level where selling

costs are the same for each alternative, the manufacturer

would be indifferent to using one or the other salesforce

type if it were acting strictly on an economic basis. Below

that level, a manufacturer’s agency provides the preferred

option. Above it, a company salesforce is preferable. Thus,

sales agencies tend to be used by smaller firms, by bigger

firms when they enter smaller territories, or when sales

volume is too small to warrant an internal salesforce.

It is important to note that agencies sometimes act like

opportunistically by limiting market development. Sales

volume then remains below the level necessary to support a

company-owned sakesforce. Also, a distributor may demand

slotting or promotional allowances, exclusive dealing

agreements, or inordinately high margins as a levy for

continuing to carry the product.

Control and Resources Criteria

Organisations are generally not self-sufficient. The fewer

an organisation’s intermediaries and the higher its

financial resources, the more control the organisation

retains. Conversely, the more a firm depends on external

resources, the lesser control it retains. Intermediary

selection often requires a compromise between the desire to

control key functions and the need to develop maximum market

coverage for a given expenditure level. Control often

provides the decisive factor in this intremediary selection

decision.

Flexibility Criterai

Before an intermediary can be selected, channel members must

reach some degree of commitment to the proposed

relationship. The commitment inevitably lessens the channel

member’s ability to respond to changing environmental

opportunities or threats. In highly volatile or uncertain

markets, manufacturers seek channel structures that allow

them to rapidly shift their channel strategy.

On the contrary, if control is not so important, the company

would likely use an external agency in a volatile market.

That’s because the latter arrangement gives the firm more

flexibility to exit if the market has declined.

SELECTING THE BEST CHANNEL DESIGN

The best channel design is one that offers the highest

performance effectivenessat the lowest possible cost. To

select an optimal structure, the channel manager would have

to calculate the expected revenues and costs associated with

each alternative structure. However, most marketers are

incapable of precisely specifying all the possible design

alternatives. And even when they are, calculating the exact

revenues and costs associated with each alternative would be

impossible.

Several criteria used to estimate an optimal allocation of

key market functions

(i) Analysing desired channel output utilities

To select the best channel design, the organisation first

needs to understand why its targeted customers buy.

Customers’ purchase decisions can be divided into basic

categories called Channel Output Utilities. Different

marketing channels provide more or less of these utilities :

(a) Convenience (Temporal and Spatial) Utility

Waiting time – the time that customers must wait to receive

the goods is a direct indicator of temporal convenience.

Customers normally prefer fast delivery channels. In turn,

faster delivery channels require higher service levels.

Spatial Convenience reflects the ease with which a product

or service may be acquired.

(b) Lot Size Utility

The number of product units that a customer acquires during

a transaction is the lot size. The smaller the lot size, the

greater the service utility the channel design must provide.

(c) Selection Utility :

Selection is the product assortment breadth (variety)

provided by the marketing channel. Business and household

consumers normally prefer greater selection because the

chances of their needs being exactly satisfied are then

improved.

(d) Service Utility

Service utility is the value-added dimensions of a market

offering (eg. Easy credit, free delivery, installation,

repairs) provided by a channel. The greater the service the

higher the number of marketing functions provided by the

channel.

Marketing channels can be designed to provide more or less

of these four channel output utilities. When organisation’s

channel designs provide more of an output desired by end-

users, they will enjoy a competitive advantage. But

providing increased level of an output means increased

channel costs and usually higher prices for end-users.

The trade-off between prices charged and channel utilities

received is an important competitive weapon. Many consumers

place little importance on some channel outputs, and

therefore, will not pay for them. But certain outputs are

highly valued by consumers and they are willing to pay for

them. When important outputs are delivered at little or no

expense through a channel design, customers receive extra

value. Competitors then feel the pressure to follow suit

with their own design.

Analysing Channel objectives and Product Characteristics

Distribution goals are outcomes towards which the

distribution efforts are directed. These goals should be

consistent with the firm’s overall marketing strategy.

Distribution goals must be expressed in terms of channel

output utilities sought. In competitive markets,

organisations should arrange their functional tasks in ways

that minimise total costs while achieving the desired

channel output utilities.

Distribution goals change depending upon several product

characteristics that include :

(i) Unit Value : Generally, the lower a product’s unit

value, the longer its distribution channel will be. The

product’s lower value leaves only a small margin to

cover each intermediary’s costs. High value products

are normally sold through a company salesforce rather

than through intermediaries.

(ii) Standardisation : Non-standardised products are usually

sold directly because intermediaries often lack the

required specialised knowledge. Products requiring

installation and/or heavy maintenance service are sold

directly to end-users Standardised products are

typically sold through channels featuring more than one

intermediary.

(iii) Bulkiness : Bulky or heavy products often have

high handling and shipping costs relative to their

value. Such products demand channels that minimise

distance and the amount of handling that occurs on the

path between producers and consumers. Channels for

perishable products should also be shortened to

accommodate the need for timely delivery.

(iv) Complexity : Highly complex products are usually

distributed to consumer and industrial markets through

direct channels. Complex products need salespeople who

are capable of conveying the product’s technical

features to potential users, and service people who

provide continuing value after the sale.

(v) Stage of Product Lifecycle : Many new products require

extensive and aggressive promotional efforts during

their introductory stage to establish demand. The

longer the channel, the more difficult it is to attain

this type of effort from each intermediary. As products

progress through their lifecycle, their channels are

generally lengthened.

Analysing Market Behaviours and Segments

Analysing current and potential buyer behaviours is the

primary job of many key employees in conventional marketing

systems. The question of who is doing the buying is

particularly crucial. This implies that direct distribution

is preferable, since it allows for greater control over the

salesforce. The use of a company salesperson can ensure that

all parties who have an inputin the buying decision are

contacted.

Other questions pertaining to when, how and where end-users

buy are also relevant and need to be answered. For example,

if the buying patterns are seasonal, intermediaries that can

perform the storage purpose should be added to the channel.

The storage function flattens what are otherwise peaks and

valleys in production. Consumers are increasingly shopping

for products from their homes. This trend implies that

producers should eliminate intermediaries such as

wholesalers and retailers and sell direct. By contrast, for

those products that consumers typically buy in small

quantities, long channels involving several intermediaries

are usually needed.

Many manufacturers think primarily in terms of geographic

coverage before considering the coverage of distinct market

segments.

Finally, customers prefer to deal with intermediaries that

know their industry’s language. Thus, wise manufacturers

design different types of marketing channels to serve

specialised market segments.

EVALUATING CHANNEL STRUCTURE PERFORMANCE

Once a channel arrangement has been established, firms

should periodically review the performance of their

intermediaries. Channel systems inevitably require changes

to meet new or changing conditions in the marketplace.

Channel members should first review the sales growth that

the intermediaries allow them to achieve and consider

eliminating intermediaries whose sales fall below

expectations.

By performing a thorough evaluation, firms occasionally

discover that they are paying channel members too much in

relation to what they receive in return. Underperforming

intermediaries should be counseled, retrained or

remotivated. Channel members should terminate their dealings

with intermediaries who do not respond satisfactorily to

recommended modifications.

MODIFYING EXISTING CHANNELS

Channel Adjustments – purposeful modifications to

intermediary relationships – become necessary when consumer

buying patterns change, markets expand, new competition

arises, or as newer, innovative distribution channel options

become available. The relationship marketing approach

championed by the CRM counsels channel members to consider

how changes in channel structure will impact relationships

at every level of the distribution system.

Channel adjustments generally involve one of the three

possible moves :

- add or drop individual intermediaries

- add or drop particular marketing channels

- develop a totally new way of distributing and selling

goods within a particular market

The most difficult adjustments are those whose

implementation necessitates revising the overall channel

strategy. Such decisions would require changes in at least

three of the four marketing mix decision areas; that is,

product, promotion, and of course, distribution. Price will

probably be changed, as well. The consequences associated

with each channel adjustment would also be significant.

Three specific types of channels modification are those

associated with product lifecycles, customer-driven

refinement, and the need for multi-channel systems.

Product Lifecycle Changes

Many companies either fail to recognise or do not act on the

fact that the distribution and selling requirements for a

product change over its lifecycle. No single channel design

will be appropriate during the entire product lifecycle.

Products that are ‘new to the world’ require a specialised

channel design that can provide technical assistance as bugs

are worked out and missionary efforts as new users are

developed within the marketplace. To justify all these

educational efforts, distributors may demand an exclusive

arrangement. As a product matures, becoming more

standardised and better known, less specialised knowledge

and efforts are needed to sell it. Manufacturers can then

expand the number of intermediaries distributing the item,

as buyers invariably switch to lower-cost channels.

Introductory Stage : Service utility, eg. Boutiques

Growth Stage : Selection utility, eg. Better department

stores

Maturity Stage : Lot size utility, eg. Merchandisers

Decilne Stage : Convenience utility , eg. Offprice outlets

Customer-Driven Refinement of Existing Chanels

The capability of any channel that is not modified decreases

as time passes. Gaps inevitably arise between an existing

channel and an ideal system. Eventually, customers will

switch to those distribution systems that deliver the

sought-after benefits and services. To be successful,

marketing organisations must be aware of these customer-

driven changes and be willing to switch as well.

Yet, channels of distribution are difficult to change.

Proposed changes often meet resistance and implemented

changes sometimes encounter outright subversion.

A customer – driven approach to channels system modification

Step 1 : Determine what target customers would like to have

in the way of a channel services if no constraints existed.

Step 2 : Conceptualise alternative channel structures

(designs) that would provide the types of channel services

referred to in Step 1.

Step 3 : Measure and classify the feasibilty and cost of

these alternative channel designs.

Step 4 : Collect the manufacturing firm’s’ executives’

objectives for the firm’s distribution system. At this

point, it is likely that certain principles which must be

observed will be brought to attention.

Step 5 : Compare the available channel design options given

management’s criteria on the one hand and the customer’s

ideal system on the other.

Step 6 : have selected outside experts review management’s

key assumptions. This step allows management to understand

the costs of their assumptions and constraints as well as

the gains and risks of changing them.

Step 7 : Close the gaps between the ideal system, the

management-bound system, and the current system so that the

channel will be more customer-driven. This task is “on”

management, which has to agree on what changes it is willing

to make.

Step 8 : Develop a plan describing how the agreed-upon

changes will be implemented.

Growth of Multi-channel Marketing Systems

This type of channel modification relates the recent growth

of multichannel marketing systems. In the past, many

manufacturers sold through a single channel. Today, with the

growth of more precise segmentation methods, many firms are

adopting multichannel marketing. Multichannel marketing

occurs when a single firm uses two or more marketing

channels to reach one or more segments. This practice is

also known as Dual Distribution.

By pursuing more segments, firms usually achieve increased

market coverage, lower distribution cost, and more

specialised marketing efforts. Firms often add a channel to

reach customer segments that their current channel cannot

reach. On othe occassions, organisations add distribution

channels to reduce their costs of goods sold. (eg.

Telemarketing). Or, channels may be added because the

intermediary’s marketing strengths fit the firm’s needs.

Companies also establish different channels to sell to

different-sized customers. Direct sales may be best for

handling larger customers. By contrast, a telemarketing

company that features a field sales force supplement on an

as-needed basis may prove best for dealing with smaller

customers and prospects. Such a solution is often attractive

because the producing firm can contact and service more

customers at a cost and customisation level that is

appropriate to each.

New channels typically introduce more conflict and control

problems into the distribution system. Conflicts can arise

when two or more channels end up vying for the same

customers, and control problems can arise when new channels

are more independent than older ones.

DESIGNING CHANNELS TO CAPTURE CHANNEL POSITIONS

A channel position is reflected in the reputation a channel

member earns among its current and potential intermediaries

for supplying market offerings, financial returns,

programmes and systems that are better than those offered by

competing channel members. To succeed in today’s market,

marketers must gain a reputation for providing their

customers superior value. A reputation for furnishing such

value is reflected in the position firms enjoy in the

marketplace.

Intermediaries may easily carry a hundred lines, sometimes

even those of direct competitors. Therefore, manufacturers

and wholesalers should strive to provide intermediaries with

superior value relative to outcomes offered by competing

channel members. Value may come from the resale of products,

from support programmes and incentives, or perhaps, the

channel relationship itself. This is known as the pursuit of

a Sustainable partnership advantage. Over time, channel

partnership advantages make intermediaries more dependant on

their channel partner. In turn, intermediaries themselves

will be more willing to contribute to a

partnership/relationship orientation through improved

marketing efforts on the producer’s behalf.

Turning Industrial Channel Intermediaries into Channel

Partners

- Making Multilevel Calls

- Working the Counter : Here, the sales reps spend an

entire day with each distributor, working behind the

counter in order to understand the distributor’s

concerns, problems and opportunities.

- Distributor Marketing steering Committee : This group

meets on a regular basis to discuss problems, trends

and opportunities.

- Annual retreats : Here, several young or relatively

inexperienced distributor managers and a similar group

of the firm’s salespeople are chosen to attend and

interact together in educational seminars and social

outings.

- Annual Mail Surveys : In these surveys, the

distributors are asked to rate the firm’s performance

on key dimensions. Feedback is provided to the

distributor respondents.

- Newsletters and Videotapes : Distributors could also be

informed about new products and new product

modifications through newsletters and videotapes.

Photocopies of distributor invoices are also collected

and analysed. From this analysis, customised advice on

how various distributors might improve their sales is

provided.

- Formal Distributor Marketing Plans : A distrbutor

marketing manager may be appointed who works with

distributors to produce formal distributor marketing

plans.

REAL WORLD CHANNEL DESIGN

The typical channel institution’s owner or manager makes

decisions and evaluates options in a much narrower context

and shorter time frame than most channel design theories

would allow. Such circumstances, in fact, reinforce the

reasons why channel managers should carefully weigh and

continuously evaluate their channel design.

Better designed channels invariably enjoy advantages. Less

intensive and more harmonious contacts among channel

members, fewer duplications of efforts, greater

standardisation of those activities performed at different

market levels, less reliance on fewer product lines, faster

and better communications, lower-risk operations, more

introduction of advanced technologies, and higher

productivity all emerge from effective design. Each

advantage leads directly to greater efficiency and

profitability for the better-designed and more effectively

coordinated channel.

Selecting the right intermediaries, assigning them the

proper functions, and formulating the channel structures

necessary to ensure that everyone fulfils their

responsibilities will go a long way toward allowing a firm

to capture – and hold onto – a channel position.

TOPIC 6 CHANNEL MANAGEMENT

TOPIC 6: BEHAVIOUR OF CHANNEL MEMBERS

Understanding of the behavioural processes occurring in themarketing channels and the ability to apply this knowledgein the development and management of the marketing channelare important part of channel management.

The channel may no longer be viewed simply as an economicsystem affected solely by economic variables. Rather thefundamental behavioural dimensions present in all socialsystems – such as conflict, power, role, and communicationprocesses – come into play.

Conflict in the marketing channelMarketing channel being a social system, it cannot escapethe fundamental behavioural dimension interest of all socialsystems – conflict. Conflict exists when a member of themarketing channel perceives that another member’s actionsimpede the attainment of his or her goals. A state ofconflict may, therefore, exist when two or more componentsof any given system of action, e.g. a channel ofdistribution, becomes objects of each other’s frustration.Analysis and research have pointed to many possible causesof channel conflict; such causes as misunderstandingcommunications, divergent functional specializations andgoals of channel members and failing in joint decisionmaking processes have been cited. Other causes includediffering economic objectives, ideological differences ofchannel members and inappropriate channel structure. Stillother studies found conflict associated with such factors asdiffering perceptions, leadership styles, financial terms ofsales and goals.

Causes of channel conflict

The causes of channel conflict are extremely diverse. Theycan however be placed into one or more of the followingseven categories:

(a) Role incognitionA role is a set of prescriptions defining what thebehaviour of channel members should be. Any givenmember of the marketing channel has a series of rolesthat he or she is expected to fulfill. If any memberdeviates from the given role, a conflict situation mayresult.

(b) Resource securitiesSometimes conflict stems from a disagreement betweenchannel members over the allocation of some valuableresources needed to achieve the respective goals. Acommon example is the allocation of retailers betweenmanufacturers and wholesalers. The retailers areviewed by both the manufacturer and the wholesaler asvaluable resources necessary to achieve theirdistribution objectives. Frequently the manufacturerwill decide to keep some of the higher volume retailersas a house account (stores to which the manufacturerwill sell to directly). This leads to objectives bythe wholesaler over what is considered to be anunfavourable allocation of this resource (theretailers). This kind of dispute often leads toconflict.

(c) Perceptual differencesPerception refers to the way an individual selects andinterprets environmental stimuli. The way such stimuliare perceived. In a marketing channel context, thevarious channel members may perceive the same stimulibut attach quite different interpretations to them. Acommon example of this in the marketing channel is theuse of point-of-purchase (POP) displays. Themanufacturer who provides these usually perceives POPas a valuable promotional tool needed to move productsoff a retailer’s shelves. The retailer on the otherhand, often perceives point-of-purchase material asuseless junk that serves only to take up valuable flowspace.

(d) Expectational differencesVarious channel members have expectations about thebehaviour of other channel members. In practice, theseexpectations are predictions or forecast concerning thefuture behaviour of other channel members. Sometimesthese forecasts turn out to be inaccurate, but the

channel member who makes the forecast will take actionbased on the predicted outcomes. By doing so, aresponse behaviour can be elicited from another channelmember, which might not have occurred in the absence oforiginal action.

(e) Decision domain disagreementsChannel members explicitly or implicitly cave out forthemselves an area of decision making that they feel isexclusively theirs. In contractual channel systems,such as a franchise, these decision domains are quiteexplicit and are usually spelled out meticulously inthe franchise contract. But in the more traditional,loosely assigned channels made up of independent firms,the decision domains are sometimes “up for grabs”.Hence, conflicts can arise over which member has theright to make what decisions. A traditional andpervasive example of this has been in the area ofpricing decisions. Many retailers feel that pricingdecisions are in the decision making domain. Some ofthe manufacturers supplying these retailers, however,believe that they should have a say in price-makingdecisions.

(f) Goal incompatibilitiesEach member of the marketing channel has his or her owngoals. When the goals of two or more of the membersare incompatible – which happens often – conflict canresult.

(g) Communication difficultiesCommunication is the vehicle for all interactions amongthe channel members, whether such interactions arecooperative or conflicting. Breakdown incommunications can quickly turn a cooperativerelationship into a conflicting one.

Managing channel conflict

Channel conflict can have a negative effect on theperformance of the channel. It therefore has to be managed.The following are some of the ways of managing channelconflict.

Acception of super-ordinate goalsChannel members come to an agreement on the fundamentalgoal. They are jointly seeking whether it is survival,market share, high quality, or customer satisfaction. Theyusually do this when the channel faces an outside threatsuch as a more efficient competing channel, an adverse pieceof legislations or a shift is consumer desires.

Co-optationThis is an effort by one organization to win the support ofthe leaders of another organization by including them inadvising councils, boards of directors, and the like. Aslong as the initiating organization treats the leadersseriously and listens to their opinions, co-optation canreduce conflict, but the initiating organization may have tocomprise its policies and plan to win their support

Diplomacy, mediation and arbitrationWhen conflict is ……. or acute, the parties may have toresort to diplomacy, mediation or arbitration. Diplomacytakes place when each side sends a person or group to meetwith its counterparts to resolve the conflict. Mediationmeans resisting to a neutral third party who is skilled inconciliating the two parties interests. Arbitration occurswhen the two parties agrees to present their arguments toone or more arbitrators and accept the arbitration decision.Sometimes, when none of these methods proves effective, acompany or a channel partner may choose to file a law suit.

TOPIC 7: DEVELOPING THE MARKETING CHANNELS

Strategy in marketing channelMarketing channel strategy can be viewed as a special caseof the more general marketing strategy and can be defined as“the broad principles by which the firm expects to achieveits distribution objectives for its target market(s). Thus,marketing channel strategy is concerned with the placeaspect of marketing strategy. To achieve their distributionobjectives, most firms will have to address six basicdistribution decisions:

1. What role should distribution play in the firm’soverall objectives and strategies?

2. What role should distribution play in the marketingmix?

3. How should the firm’s marketing channels be designed toachieve its distribution objectives?

4. What kinds of channel members should be selected tomeet the firm’s distribution objectives?

5. how can the marketing channel be managed to implementthe firm’s channel design effectively and efficientlyin a continuing basis?

6. How can channel member performance be evaluated?

Questions

1. How does channel strategy relate to marketing strategy?2. Delineate and comment briefly on the six basic

distribution decisions most firms will need to considerat one time or another.

Designing the marketing channelChannel design refer to these decisions involving thedevelopment of new marketing channels where none had existedbefore or to the modification of existing channels.Producers, manufacturers, wholesalers and retailers all facechannel design decisions. For retailers, however, channeldesign is viewed from a perspective opposite that ofproducers and manufacturers. Retailers look “up thechannel” in an attempt to secure supplies, rather than “down

the channel” toward the market. Wholesale intermediariesface channel design decision from both perspectives. Thechannel design decision can be broken down into seven phasesor steps:

1. Re-organising the need for a channel design decision.2. Setting and coordinating distribution objectives3. Specifying the distribution tasks.4. Developing possible alternative channel structures5. Choosing the ‘best’ channel structure6. Selecting the channel members.

Selecting the channel membersThe channel members selection process consists of thefollowing three steps:

1. Finding prospective members2. Applying selection criteria to determine the

suitability of prospective channel members3. Selecting the prospective channel members as actualchannel members.

Finding prospective channel membersA variety of sources is available to help the channel memberfind prospective channel members. The most important ofthese are listed in the order of importance as follows:

1. Field sales organizations2. Trade sources3. Resellers inquiries4. Customers5. Advertising6. Trade shows7. Other sources

Applying selection criteriaSeveral channel analysis have developed generalized lists ofcriteria. However, no lists of criteria, no matter howcarefully developed, is adequate for a firm under all

conditions. Changing circumstances may at some pointrequire the firm to alter its emphasis, so the channelmanager should be flexible in the use of selection criteriato allow for changing conditions. A half century ago, inone of the first attempts to specify a set of selectioncriteria for choosing channel members, Brendel developed alist of 20 key questions for industrial firms to ask theirprospective channel members. Many of these questions arerelevant for consumer products firms as well. Brendel’slist of selection criteria, which has become a classic inthe marketing channels literature, is as relevant as it everwas. This list of 20 selection questions is as follows:

1. Does the distributor really want or live or is he orshe after it just because of present day shortages?

2. How well established is he or she?3. What is his or her reputation among his or her

customers?4. What is his or her reputation among manufacturers?5. Is he or she aggressive?6. What other allied lines does the distributor handle?7. What is the distributors financial position?8. Has he or she the ability to discount his or her bills?9. What is the size of his or her plant (facilities)?10. Will he or she maintain an adequate inventory for

services?11. To what important customers does the distributor sell?12. To which ones does he or she not sell?13. Does the distributor maintain stable prices?14. Does he or she give yearly sales figures for the past

five years?15. What territory does the distributor actually cover with

salespeople?16. Are the distributor’s sales people trained?17. How many field personnel does he or she have?18. How many inside employees?19. Does the distributor believe in active cooperation,

sales training and sales promotion.

20. What facilities does the distributor have for theseactivities?

Securing the channel membersIt is important to remember that the selection process is atwo-way street. It is not only the producer or manufacturerwho does the selecting but also the intermediaries at boththe wholesale and retail levels. Those who are large andwell established can be very selective about whom they willrepresent. Producers and manufacturers, except for thosewith truly extraordinary reputations and prestige, cannotexpect quality intermediaries to stand in line to becomechannel members. Rather, most producers and manufacturersstill need to do an effective selling job to secure theservices of good intermediaries. The channel manager inproducing and manufacturing firms can use a number ofspecific ……. In attempting to secure channel members. Allof these, however, should be aimed at conveying toprospective channel members the firms commitment to supportthem so that they are more likely to be successful with theline. In other words, the manufacturer or producer shouldconvey to the prospective intermediary that the partnershipwill be mutually beneficial if each of the parties does thejob.

Target markets and channel design strategyMarketing channel design strategy should be market driven soas to meet as closely as possible the demands of the firm’starget market. To do this successfully, the channel managershould be familiar with several dimensions of markets asthey relate to the design of marketing channels. Markets,whether consumer or industrial, are complex. 4 myriad offactors may have to be considered in analyzing particularmarkets, so it is useful to have a framework to help providesome order to this complexity. A framework consisting ofthe following four basic dimensions can be used to discussmarkets:

1. Market geography

2. Market size3. Market density4. Market behaviour

QuestionThe national sales manager of a major appliance makerrealized that the company would have to add more wholesaledistribution in at least a half dozen major territories ofthe central region of Kenya. The sales manager knew that heneeded good distributors. The sales manager decided to usethe company’s outside sales force from covering thoseterritories. He sent out memos to the district salesmanagers who in turn informed the field sales … to call onpotential distributors in their territories and send backwritten reports. One month later, the sales manager wasvery disappointed with the lukewarm responses he got. Thereports he got were skimpy and super-official. The salesmanager was befuddled with the situation because all thesalespeople who were asked to prospect for new accounts werehigh producers. Why do you suppose the sales manager didnot get the enthusiastic response he wanted?

Question:There is an old saying that predates the marketing conceptby perhaps 100 years. “The customer is king”. This isusually interpreted to mean that businesses should rememberthat the only reason they are in business is to serve thecustomer – for without customers there would be no business.This expression is seldom related to the design of markedchannels yet, in the long run it is not the “customer king”who decreases the structure of the marketing channels thatultimately develop? Do you agree or disagree? Discuss thestatement using several examples for or against.

TOPIC 5: MANAGING THE MARKETING CHANNEL

For a manufacturer to be able to successfully achieve itsmarketing objectives through the marketing channel, the

marketing channel must be effectively managed. Managingmarketing channel involves the following issues:

1. Motivating the channel members2. Product issues in channel management3. Pricing issues in channel management4. Promotion through the marketing channel5. Logistics and channel management6. Evaluating channel member performance.

Channel management can be defined as the administration ofexisting channels to secure the cooperation of channelmembers in achieving the firm’s distribution objectives.

Motivating the channel membersIn the context of channel management, motivation refers tothe actions taken by the manufacturer to foster channelmember cooperation in implementing the manufacturer’sdistribution objectives. The following are the three basicfacets involved in motivation managements in the channel:

1. Finding out the needs and problems of channel members.2. Offering support to the channel members that is

consistent with their needs and problems.3. Providing leadership through the effective use of power

Finding out the needs and problems of channel membersBefore the channel manager can successfully motivate channelmembers, an attempt must be made to learn what the memberswant from the channel relationship. They may perceive needsand face problems quite different from those of themanufacturer. McVay has pointed to these differences withseveral classic propositions that can be summarized asfollows:

1. The middleman does not consider himself a “hired linkin a chain forged by the manufacturer”.

2. The middleman acts first and foremost as a purchasingagent for his customers and only secondarily as a

selling agent for suppliers. His interest is unsellingwhatever products his customers wish to buy from him.

3. The middleman views all the products he orders as a‘family’ of items that he sells as a packagedassortment to individual customers. He directs hisselling efforts primarily at obtaining orders for theassortment, rather than for individual items.

4. Unless given some incentive to do so, the middlemanwill not maintain separate sales records by brandssold. Information that might be useful tomanufacturers in product development, pricing,packaging, or promotional planning is “buried” in themiddleman’s own records, sometimes even purposely keptfrom suppliers.

Offering support to channel membersSupport for channel members refers to the manufacturersefforts in helping channel members to meet their needs andsolve their problems. Such support properly applied, shouldhelp to create a more highly motivated group of channelmembers. Unfortunately, support for channel members is alltoo often offered in a desorganised and ad hoc basis. Whenchannel members appear to lack motivation, they are pumpedup with an extra price incentive, advertising allowance,dealer contest, or even a nice talk by the manufacturer. McCammin noted that many programs developed by themanufacturer consists of hastily improvised trade deals,uninspired dealer contests, and unexamined discountstructures, a traditional altitude toward distributormanagement that can no longer work. The attainment of ahighly motivated cooperating “team” of channel members in aninterorganisational selling requires a carefully plannedprograms. Such programs for providing channel membersupport can generally be grouped into one of the followingcategories:

1. Cooperative2. Partnership or strategic alliance3. Distribution programming

Providing leadership to motivate channel membersEven if the channel manager has developed an excellentsystem for learning about channel members needs andproblems, and no matter what approach is used to supportthem, control must still be exercised through effectiveleadership on a continuing basis to attain a well motivatedteam of channel members. It is however important to notethat it is very difficult for the channel manager to achievetotal control, no matter how much power underlies his or herleadership attempts. Because firms are loosely arranged,the advantages of central direction are in large measuremissing. This absence of single ownership, or closecontractual agreements means that the benefits of a formalpower (superior, subordinate) base are not realized. Thereward and penalty system is not as precise and is lesseasily affected. Similarly, overall planning for the entiresystem is uncoordinated and the perspective necessary tomaximize total system effort is diffused. Less recognitionof common goals by various member firms in the channel ascompared to a finally structured organization is alsoprobable.

QuestionToyota Motor Corporation took extraordinary care indeveloping the channel and selecting the dealers for itsLexus luxury cars. The attention to detail in selling upthe channel for the Lexus is reminiscent of the kind of careToyota gives to the building of its cars. In fact,standards for dealership cover such minute details asselling specification for doorknob designs and the grade ofvice paper for … … screens used to decorate the dealerships.It could be seen that everything had been so carefullyplanned that the Lexus dealerships should virtually ranthemselves. Comment on its situation in terms of the needfor channel management and the motivation of channelmembers.

Product issues in channel management

Many potential interfaces exist between product managementand channel management. These interfaces are discussed asfollows:

Product planning and channel managementThe development of new products is a challenge faced byvirtually all producers and manufacturers serving bothconsumer and industrial markets. New technologies, changingcustomer preferences, and competitive forces all contributeto the need to introduce new products. Yet the success rateof new products is dismally low, such that new productfailure rates of 90% are not unusual for some firms evenwith heavy national advertising. Given such high rate ofnew product failure, manufacturers need to do a much betterjob of new product planning and development if they hope toreduce these high rates of product failure.

Achieving success for new products is dependant on manyfactors, such as the innovativeness and quality of productitself, its price, how effectively it is promoted, thenature of customer demand, competitive factors, timing andmany others. One of this other factors is the degree ofsupport a new product receives from independent channelmembers. Without a high level of cooperation from thechannel members, for a new product. It is therefore crucialfor a channel manager to analyse the possible channelimplications in the planning and development stage topromote a high level of cooperation from the channel membersin gaining a successful market for the product. Althoughthere are many possible issues that the channel manager mayconsider, depending on the type of industry and theparticular circumstances involved, the following five issuesare frequently important for a wide range of channels:

1. What input, if any, can channel members provide intonew product planning?

2. What has been done to assure that new products will beacceptable to the channel members?

Sale curveMaturity

Time

Growth

Introduc

Sales

3. Do the new products fit into the present channelmembers’ assortment?

4. Will any special education or training be necessary toprepare the channel members to sell new productseffectively?

5. Will the product cause the channel members any specialproblems?

Product life cycle and channel managementThe product life cycle (PLC) is a model for describing thestages through which a product passes. A product typicallyfollows a curve, which can be divided into four basicstages: Introduction, growth, maturity and decline.

Decline

Maturity

Sales

The introductory stage is one of slow growth as the productbegins to gain a foothold in the market. Profits, as shownby the profit curve are non existent or very low during thisstage due to high costs of introducing the product in themarket. The growth stage is marked by rapid marketacceptance and relatively high profits as shown by thesteeper upward slopes of the sales and profit curves duringthis stage. Maturity is characterized by a decreasing rateof sales growth as the market become more highly saturated.Profits tend to peak and then decline during the maturitystage because of heavy selling costs necessary for theproduct to hold its own against competition. Finallydecline occurs when sales decrease absolutely and profitplummet quickly to zero point.Not all products pass through this life cycle, there aremany exceptions and varieties. Despite such variations, thePLC is still useful as a framework for developing marketingstrategies during the different stages. The major channelmanagement implications of the four stages of the productlife cycle is discussed here below:

Time

Growth

Introduc

Decline

Assumesufficientnumber ofchannelmembers for adequatemarket coverage

1. Same aspoint one intheintroductorystage butemphasis onadequacy of channelmemberinventory

1. Extraemphasis onmotivatingchannelmembers tomitigate competitiveimpact

1. Phase outmarginal channelmembers

2. Assumeadequatesupply onchannelmembersshelves

2. Monitorthe effectsof competitiveproducts on channelmembersupport

2.Investigatepossibilityfor changesin channelstructure toextendmaturitystage andpossiblyfoster newgrowthstage.

2. investigateimpact ofproduct deletionon channelmembers.

Strategic product management and channel management

Strategic management of the product line is a challengefaced by virtually all manufacturers. No product line canbe simply left alone to remain fixed in time – certainly notif it is to remain a viable and profitable product line.Successful product strategies depend on a variety of factorssuch as the quality, innovativeness, or technological

sophistication of the products themselves, the capabilitiesof the managers charged with overseeing the product line,the financial capacity and willingness of the firm toprovide the promotional support often necessary to implementproduct strategies and several other factors. One of theseother factors, and a frequently overlooked one is the roleplayed by channel members in implementing productstrategies. Since most manufacturers do not market theirproducts directly to their final users, they will at somepoint have to call on their channel members to implement theproduct strategies formulated by manufacturers. Thus, thesuccess of the manufacturers produced strategies is, atleast to some extent – dependent upon the effectiveness ofthe channel members in carrying out the manufacturersproduct strategies.

Product differentiation is probably the most widely usedproduct strategy. In essence, product differentiationrepresents the manufacturers attempt to portray a product orproducts and therefore more desirable to purchase, eventhough the price may be the same. The task of conveyingthis difference is not always just the manufacturers job.Channel members may also be called upon to help create adifferentiated product. The kinds of stores the product issold in, the way it is displayed and sold and the servicesprovided can be critical in creating a differentiatedproduct.

Product positioning is another widely used product strategy.Basically, product positioning refers to a manufacturer’sattempt to have consumers perceive the product in aparticular way relevant to competitive products. If this isaccomplished, the product is then “positioned” in consumersmind as an alternative to other products that they currentlyuse. While successful product positioning strategy dependsupon many factors, the types of stores selling the productand how they display and promote it can be very important.

At one time or another, most manufacturers find it necessaryto expand or contract their product lines. Product lineexpansion and pruning strategies can create problems indealing with channel members because it is very difficult tofind a “perfect” blend of products in the line that willsatisfy channel members. When the product line is expanded,some of the channel members may complain about productproliferation, which increases the inventory costs andcomplicates their selling job. When products are droppedfrom the line, other channel members may …….. about loosingproducts for which they still have plenty of customers.Product line expansion and pruning strategies can presentthe manufacturer with delicate balancing act of channelmember satisfaction and support for reshaped product line.While there are no simple, clear-cut approaches for havingthe right mix of products to satisfy ever more demandingchannel members, several points are worth considering whiledealing with the interface between channel strategy. First,although a manufacturer obviously must be the master of itsown product line and be free to change it in what isbelieved to be its best interests, it makes good sense toincorporate channel member views whenever possible. Second,the manufacturer should attempt to explain to channelmembers the rationale underlying product line expansion ordeletion strategies. Finally, the manufacturer should tryto provide adequate line changes to channel members to allowthem sufficient time to prepare for such changes.

Most manufacturers have several options when consideringproduct brand strategies. They might sell all theirproducts:(i) Under one national brand(ii) Under several national brands(iii) Under private brands(iv) Under both national and private brands.

Any of these options may at certain times pose channelmanagement problems. Hence the manufacturer should at least

attempt to delineate some of the possible distributionscenarios that can cause more difficulties.Many products in both the consumer and the industrialspheres require service after the sale. Thus themanufacturers of these products should make provisions forafter-sales service, by either offering it directly at thefactory, through their own network of service center,through channel members, through authorized independentservice centers, or by some combination of theseorganizations. Poor product service may reflect shortcomingnot only in product management but also in channelmanagement because it is the job of the marketing channel tomake the necessary service available to the final usersalong with the product.

Questions1. Fitting new products to the channel members assortment

may sometimes be a problem. When might this be thecase?

2. Discuss the product life cycle stages and the basicimplications of each stage for channel management.

3. Under which conditions might a seemingly simple productdeletion decision create possible adverse reaction inthe part of channel members?

4. Discuss the relationship between strategic productmanagement and channel management.

5. Explain the role played by channel management in theimplementation of product differentiation and productpositioning strategies.

6. Discuss the role of the marketing channels in providingafter-sales service.

Pricing issues in channel management

Studies of top-level marketing executives have found thatpricing decision causes them more concern than any otherstrategic marketing decision area. This is because pricinghas a direct link to the firm bottom line. It is not enoughto base pricing decisions solely on the market, internalcost considerations and competitive factors. Rather, forthose firms using independent channel members, explicitconsideration of how pricing decision affect channel memberbehaviour is an important part of pricing strategy.Therefore, pricing decisions can have substantial impact inchannel member needs or appear to come against them, a muchlower level of cooperation or even conflict is the likelyresult. Thus the major challenge facing the channel managerin the area of pricing is to help foster pricing strategiesthat promote channel member cooperation and minimizeconflict.

Guidelines for developing effective channel pricingstrategies

Oxenfeidt offers a set of eight classic guidelines fordeveloping pricing strategies that incorporate channelconsiderations. The guidelines are as follows.

1. Each efficient reseller must obtain unit profit marginsin excess of unit operating costs.

2. Each class of reseller margins should vary inproportion to the cost of the functions the resellerperforms.

3. At all points in the vertical chain (channel levels),prices charged must be in line with those charged forcomparable rival brands.

4. Special distribution arrangements – variations infunctions performed or departures from the usual flowof merchandise should be accompanied by correspondingvariations in financial arrangements.

5. Margins allowed to any type of reseller must conform tothe conventional percentage norms unless a very strongcase can be made for departing from the norms.

6. Variations in margins on individual models and stylesof a line are permissible and expected. They must,however, vary around the conventional margin for thetrade.

7. A price structure should contain offerings at the chiefprice points, where such price points exist.

8. A manufacturer’s price structure must reflectvariations in the attractiveness of individual productofferings.

Other issues in channel pricingThe outlined eight guidelines for channel pricing deal witha wide range of channel pricing issues. Yet the channelmanager is likely to face other channel pricing issues thatrequire more specific and detailed attention. Five of themost important of these issues are:

1. Exercising control in channel pricing2. Changing price policies.3. Posing price increases through the channel.

QuestionDiscuss the basic factors to consider in developing pricingstrategies.

Promotion through the marketing channelPromotions refers to all the persuasive communicationsactivities employed by businesses and other organizations.These includes advertising, personal selling, publicity,sales promotions, sponsorship, and point-of-purchasecommunications. Some authors refer to it as integratedmarketing communications.Some manufacturers rely almost entirely in promotion in theform of advertising to their target markets to “pull” theirproducts through the channel and hence indirectly securechannel member cooperation. The belief underlying this so-

called “pull strategy” is that by building strong consumer(or industrial user) demand for a product, the manufacturerwill find channel members to automatically promote themanufacturer’s product because it is in their obvious self-interest to do so.The manufacturer also needs to work directly with thechannel members to develop strong and viable channel memberpromotional support. This approach referred to as “pushstrategy” requires more direct involvement by themanufacturer with channel members in the use of promotionalstrategies.

Promotional strategies and channel members cooperationA wide variety of strategies call for the involvement ofchannel members in the promotion of the manufacturersproducts.

Assignment one

Choose a company of your choice and then do the following:

1. Describe its channel strategy (use illustrations).2. Evaluate the effectiveness of the company’s channelstrategy.3. Recommend the most appropriate channel strategy for thecompany.

1. Topic One: Marketing Channel Concepts2. The channel participants3. The environment of marketing channels4. The behavioural processes in marketing channels5. Developing the marketing channel6. Designing the marketing channel7. Selecting the channel member8. Managing the channel member

- Motivating the channel members- product issues in channel management- pricing issues in channel management- promoting through the marketing channels

- logistics and channel management- evaluating channel member performance

Requiring channel member support and follow-through can takemany forms. Most however can be placed into the followingcategories:

(i) Cooperative advertising(ii) Promotional allowance(iii) Slotting fees(iv) Displays and selling(v) In-store promotions(vi) Contests and incentives(vii) Special deals and merchandising campaignsThe above seven promotional strategies are straight forwardand hard-hitting promotions, unabashedly aimed at gettingchannel members to push a particular competitors. Otherpromotional strategies whose ultimate purpose is also to getchannel members to push a particular manufacturers products,stress doing so using more fierce, subtly and a morecircuitous route. We refer to this as “kinder and gentler”push promoters, the most important of these are:

(i) Training programmes(ii) Quota specifications(iii) Missionary selling (detail sales people)(iv) Trade shows

Questions

1. Explain the rationale for including selling support byresellers in a distribution channel as a major tool forimplementing promotional strategy.

2. Making sure that the proposed logistics programdesigned by the manufacturer meets the channel memberservice standards

3. selling the channel member on the logistics programme

4. Monitoring the results of the logistics program once ithas been instituted.

Questions

1. Logistics is much more than simply shipping productsto customers. Explain

2. What is the essential role of logistics in thechannel? Explain

3. Briefly discuss the basic components of anylogistics system.

4. Discuss the relationship between channel managementand logistic management. Is one of these areas moreimportant than the other? Explain why or why not.

5. Identify and discuss the four major areas ofinterface between channel management and logisticsmanagement

Evaluating channel member performance

No well-managed firm could operate successfully in the longrun without periodically evaluating the performance of itsemployees. The same holds true for firms channel members.The following factors affect the scope and frequency ofevaluations:

1. Degree of the manufacturers control over the channelmembers.

2. Relative importance of the channel members3. Nature of the product4. Number of channel members

QuestionWhy is the manufacturer’s overall promotional strategydependent to a significant extent on channel membercooperation?

Logistics and Channel Management

Logistics (also referred to as physical distributors) may bedefined as planning, implementing and controlling thephysical flow of materials and final goods from points oforigin to points of use to meet customers needs at a profit– Kotler. The term supply chain management has come intocomment usage to describe logistical systems that emphasizeclose cooperation of the different firms in the channel.

The role of logisticsLogistics ensures that there is a moment of the right amountof the right products to the right place at the right timeat the lowest possible cost. The components of logisticssystems includes the following:

(i) Transportation(ii) Materials handling(iii) Order processing(iv) Inventory control(v) Warehousing(vi) Packaging

Four key areas of interface between logistics and channelmanagementThe four major areas of interface between channel managementand logistics management are:

1. Defining the kinds of logistics service standards thatchannel member wants.

The channel members performance under is a periodic andcomprehensive review of channel member performance. Theaudit may be dinner for one, several or all the channelmembers at the wholesale and/or retail levels. Thefrequency of the audit ….. but seldom is it done morefrequently than…. Per year per channel member. The channelmember performance audit consists of three phases:

1. Developing criteria for measuring channel memberperformance

2. Periodically evaluating the channel members performanceagainst the …...

3. Recommending corrective actions to reduce the numberof inadequate performances.

Questions:1. Discuss the major factors affecting the scope and

frequency of channel member performance evaluation.Explain why the evaluation of channel member performance is

(or is not) just as important as the evaluation of employee

working within firms. MODULE 15 :

FRANCHISING : AN EMERGING GLOBAL TREND

Franchising Systems

Franchising is a vertical marketing system in which one firm

(the franchisor) provides another individual or firm (the

franchisee), for consideration, a licensed privilege to do

business in a specified geographic area, along with

assistance in organising, training, merchandising, and

management. Franchising relationships differ from channel

relationships in that they really consist of three

relationships :

(i) Legal relationship : This is the contract that exists

between the franchisor and the franchisee. This legal

relationship prescribes that each party must adhere to

certain responsibilities and obligations.

(ii) Business relationship : This relationship ties the

franchise partners together in the day-to-day

activities necessary to provide acceptable products and

services to customers. The franchisee operates the

business substantially under the franchisor’s trade

name and/or marketing plan. While the legal

relationship is essentially static, the business

relationship is dynamic; it is prone to change in

response to varying market circumstances. These

changes, in turn, often lead to conflict between

franchisors and franchisees. However, as long as both

parties share a commitment to satisfy the market’s

needs and rely on one another to provide the best

products and/or services, these conflicts can be worked

out. The CRM encourages channel designs that minimize

conflict by building mutually beneficial relationships.

Successful franchisees operate on the same premise.

(iii) Nonbusiness Relationship : The non-business

relationship is the strong, forward looking cooperative

association that exists between two channel members – a

franchisor and a franchisee – each acting individually

for its own best interests. Franchisors and franchisees

are interrelated intrinsically to one another.

Franchising systems consist of networks of franchisors and

franchisees. Within this system, franchisees receive the

training, guidance and preparation necessary to use trade

secrets, operational procedures, and the systemwide

promotions required to develop and maintain a profitable

business. Franchisors, in turn, receive the expansion of a

proven concept and method of operation to multiple locations

and to multiple product or service offerings. When properly

developed, the franchising approach helps both the

franchisor and franchisee realise the profit potential of

the business.

Benefits of Franchising

- Franchising offers franchisers an alternative to

developing a company-owned outlet and provides them

with an opportunity for rapid market penetration at a

relatively low cost using independent entrepreneurs.

Market expansion is largely financed through franchisee

funds. While more control is available in corporate

VMSs, franchisors can still exercise a good deal of

control through the legal relationship.

- Franchisors do not have to motivate franchisees as much

as they would corporate employees. This is because

franchisees are generally self-motivated; they have a

financial investment at stake and can benefit directly

from the business’ success.

- Also, cooperative advertising – which is available

through the franchising system – usually achieves

better results than individual advertising.

- Increased cash flows from franchising fees

- Economies of scale in system administration

- Little borrowing is needed to expand

- Franchisees, as local entrepreneurs, are likely to gain

community acceptance more quickly than a corporate

entity and can provide franchisors with an insightful

view of local business conditions.

- The biggest benefit received by franchisees is the

excessive assistance provided by franchisors. In

exchange for start-up fees, established franchise

systems offer proven products or concepts, recognizable

brands and/or images that create credibility, and

established business procedures. Many franchise

packages include standardised methods for operations,

promotion, site location analysis, accounting and

finance, and personal training.

Types of Franchising

There are three broad types of franchises :

(i) Tied-house Franchising systems

(ii) Product/trade name franchising

(iii) Business format franchising

Tied-house franchising sprang up among German brewers in the

18th century. These brewers contracted with taverns to sell

their brand of beer exclusively.

The second generation appeared during the 19th century, when

the Singer sewing machine company elected to sell its

products to its salespeople who, in turn, were expected to

find markets for the products. This type involves the use of

franchisees to distribute a product under a franchisor’s

trademark. This type dominates automobile, retail gasoline,

and soft drink distribution.

The third generation of franchising, known as Business

Format Franchising, was introduced in the 20th century by

the A&W restaurant company. This franchise form seeks to

have franchisees replicate a complete business concept –

including product or service, trademark and methods of

operation – in their own communities.

To adapt to the changing demands of the marketplace,

franchisors have continuously altered the specific

prototypes of these broad formats. The reasons for these

innovations in franchising formats include the desire to

segment older, female and minority markets and desire to

segment older, female, and minority markets and reactions to

emerging socioeconomic trends.

Concerns of Franchisees

- In and of itself, franchising hardly guarantees a

profit. However, some franchisees feel that franchisors

have guaranteed them a profit and are thus offended

when profits fail to materialise. Indeed, unless the

franchise is run by entrepreneurs who are allowed to

manage their business under acceptable guidelines, with

a keen eye for profit, franchisees may not be

successful at all.

- A second concern for franchisees is that their business

can revert to the franchisor or be transferred to

another franchisee when their contract expires.

- Encroachment occurs when the franchisor opens another

franchise too near an existing franchise. However,

encroachment concerns cannot be resolved by

guaranteeing franchisees a protected radius because

local markets and demand conditions constantly change.

- When people choose franchising as a vehicle for market

entry, they de facto give up some independence.

Franchised outlets must generally look alike, follow

certain procedures, and fill out prescribed forms.

Their franchisor is authorised to audit the books and

has the right to terminate the relationship as per

their contract. Franchisees are also sometimes required

by contract to buy supplies from their franchisor or

franchise-sanctioned suppliers. Many franchisees chafe

under the conditions imposed by the franchising

agreement.

- Most franchisors collect promotional monies from

franchisees and pool it to launch promotional

campaigns. Issues of when and how to spend promotional

dollars and effectiveness of the various creative

approaches frequently lead to differences of opinion in

marketing channels.

- In franchising channels where franchisors make the

product available to franchisees for sale, the pricing

of that product affects the profitability of both

parties. In those situations, where franchisees must

purchase goods or supplies from their franchisor,

pricing structures can boost the franchisor’s

profitability at their franchisees’ expense.

Concerns of Franchisors

- Franchisees who decide to buy supplies or equipment

from independent sources adversely affect the

franchisor'’ profitability.

- Franchisees occasionally “sit” on a market. This occurs

when individual franchisees recognize that their market

could support additional franchises, yet they resist

expansion and are unwilling to share the market with

anyone else. Should the franchisor impose an expansion

among them, conflicts will likely arise.

- Most franchising agreements specify payment of royalty

fees to franchisors. A major concern for franchisors is

whether their franchisees are reporting their gross

sales honestly., or whether they are purposely

understating sales to avoid royalties.

- Trade secrets, marketing strategies, strategic plans,

and the like are frequently revealed to franchisees. If

these were circulated to competitors, a franchising

programme would be injured.

RELEVANT TRENDS IN THE FRANCHISING ENVIRONMENT

Social, Cultural, and Demographic Trends

Consumer interest in sociocultural issues such as education

and employment security or increasing expectation of

convenience and value are driving current franchise

development.

Current demographic trends are having a significant effect

on the formation of new franchising prototypes. They also

support the growth of existing franchises.

Corporate belt-tightening is another cultural trend that has

influenced franchising. Successful and industrious managers

who have had their fill of corporate life, and displaced

corporate executives are common profiles of the latest wave

of prospects entering franchising.

Economic Trends

These trends play a role in the formation and success of

franchises and franchise forms. Special challenges are

associated with the successful distribution of a service.

This is primarily because services vary in quality, are

intangible, and cannot be inventoried. Franchising’s primary

attributes – the ease of capital formation, the presence of

motivated entrepreneurs who provide good service along with

the standardised systems and procedures to control

operations – nicely address the problems inherently faced by

service firms.

The availability of multiple franchised locations offering

uniform service also appeals to mobile consumers.

Finally, because promotional efforts in franchising are

centralised and delivered system wide, the tangible aspects

of services are increased.

International Trends

Governments around the world are becoming aware of the

benefits that franchising can bring to their economies. In

many parts of the world, banks have set up lending divisions

to market loans to franchisees. Improvements in

transportation and communication have made the job of

controlling foreign franchises easier, and the assimilation

of Western innovations has created greater global

standardisation and consumer acceptance. Business format

franchisors have benefited most from these trends.

From a strictly business perspective, international

franchising involves less risk than many other forms of

international marketing, such as direct investment. It also

provides industries whose offerings cannot be exported (such

as services) an opportunity for market expansion. In

addition, international franchising is typically regulated

less in the host country since the domestic capital outflows

are small compared to other forms of foreign investment.

The most common foreign entry modes used by franchisors

involve the transferral of domestic rights to a master

franchisor. A master franchisor is a local entrepreneur who

assumes the rights and responsibilities of establishing or

selling franchises throughout a country or large territory

within a country. Potential frictions within the franchisor

and the customs and the values of the host country can be

reduced in this way. While there is some loss of control and

a danger of relaxed standards, this entry mode is generally

used when host government regulations are relatively

restrictive, when political or economic risk is high, or

when the franchisor’s foreign investment resources are

limited. Master franchisors operate domestically as well.

Industry Trends

The growth in the number, diversity, and sophistication of

franchisees has placed increased demands on those charged

with managing the franchisor-franchisee relationship. Just

as franchisors and franchising itself have grown, so too

have the power and size of many franchisees. Given their

greater say, these franchisees want more say about how they

operate their businesses. Such trends often lead to more

power sharing within franchising systems.

Bigger, stronger, and more aggressive franchisees are

increasingly banding together to assert their rights vis-à-

vis the obligations of powerful franchisers.

2. Franchisee associations can benefit franchisors justas much as franchisees