Designing and

Managing Value
Networks and
Marketing
Channels
Managing Marketing
Channels
Channels should be chosen
according to their efficiency,
controllability and adaptability.
Marketing Channels

Marketing Channels are sets of

interdependent organizations
involved in the process of making a
product or service available for use
or consumption.
What Work is Performed by
Marketing Channels
Many Producers lack the financial
resources to carry out direct marketing
In some cases direct marketing simply is
not feasible
Producers who do establish their own
channels can often earn a greater return
by increasing their investment in their
main business
What Work is Performed by
Marketing Channels

Number of contacts, 3x3=9

What Work is Performed by
Marketing Channels

Number of contacts, 3+3=6

 Channel Functions and
Flows
Members of the marketing channel perform a
number of key functions:
 They gather information about potential and
current customers, competitors and other actors
and forces in the marketing environment.
 They develop and disseminate persuasive
communications to stimulate purchasing
 They reach agreement on price and other terms
so that transfer of ownership or possession can
be effected
 Channel Functions and Flows
 They place orders with manufacturers
 They acquire the funds to finance inventories at
different levels in the marketing channel
 They assume risks connected with carrying out
channel work
 They provide for the successive storage and
movement of physical products
 They provide for buyers’ payment of their bills
through banks and other financial institutions
 They oversee actual transfer of ownership from one
organization or persona to another
 Channel Functions and Flows
Forward Flow of activity:
Company Customer
E.G. Physical, title, promotion etc.
Backward Flow of activity:
Customer Company
E.G. Ordering and payment
Other Flow of activity:
Company Customer
E.G.Information, negotiation, finance, risk taking
etc.
 Channel Functions and
Flows
All channel functions have three things
in common:
They use up scarce resources
they can often be performed better
through specialization
they can be shifted among channel
members
 Channel Levels
 Zero level channel/Direct marketing channel:
Manufacturer selling directly to the final customer
 One level channel:
Contains one selling intermediary, such as a retailer
 Two level channel:
contains two intermediaries, such as a wholesaler and
a retailer
 Three level channel:
contains three intermediaries, such as wholesalers,
jobbers, small retailers
Longer marketing channels can be found. All of these
channels are quite known in industrial marketing
channels
 Service Sector Channel

With the advancement of internet

technology, service industries such as
banking, insurance, travel and stock
buying and selling will take place
through new channels.
 Analyzing Customers’ Desired
service output levels
1. Lot size: The number of units the channel
permits a typical customer to purchase on one
occasion.
2. Waiting time: The average time customers of
that channel wait for receipt of the goods.
3. Spatial convenience: The degree to which the
marketing channel makes it easy for
customers to purchase the product.
 Analyzing Customers’ Desired
service output levels (contd.)

4. Product variety: The association breadth

provided by the marketing channel.
5.Service backup: The add-on service
(credit, delivery, installation, repairs)
provided by the channel.
 Establishing Objectives and
constraints
Channel objectives vary with product
characteristics.
Perishable products require more direct
marketing.
Bulky products, such as building
materials, require channels that
minimize the shipping distance and the
amount of handling in the movement
from product to consumer.
 Establishing Objectives and
constraints (Contd.)
Nonstandardized products, such as custom-
built machinery and specialized business
form, are sold directly by company sales
representatives.
Product requiring installation or maintenance
services such as heating and cooling systems
are usually sold and maintained by the
company or exclusively franchised dealers.
High-unit-value products such as generators
and turbines are often sold through a
company sales force rather than
intermediaries.
 Establishing Objectives and
constraints (Contd.)

Channel design must take into account

the strengths and weaknesses of different
types of intermediaries.

Channel design must adapt ot the larger

environment.
 Identifying Major Channel
Alternatives
A channel alternative is described by three
elements:

1. The types of available

business intermediaries
2. The number of
intermediaries needed
3. The terms and
responsibilities of each channel member
 Types of Intermediaries
The firm needs to identify the types of
intermediaries available to carry on its channel
work.

Company should search for innovative

marketing channels.

Sometimes a company chooses and

unconventional channel because of the
difficulty or cost of working with the dominant
channel. The advantage is hat the company will
envounter less competition in the initial move
into this channel.
 Number of Intermediaries
1. Exclusive distribution: means severely limiting the
number of intermediaries. Used when the producer
wants to maintain control over the service level and
service outputs offered by the resellers.
2. Selective distribution: involves the use of more than a
few but less than all of the intermediaries who are
willing to carry a particular product. Used by
established companies and by new companies seeking
distribution.
3. Intensive distribution: consists of the manufacturing
placing the goods or services in as many outlets as
possible. Used for products that require a great deal of
location convenience.
 Terms and Responsibilities of
channel Members
The main elements in the trade-relations mix
are:

Price policy calls for the producer to establish a

price list and schedule of discounts and
allowances that intermediaries see as equitable
and sufficient.

Conditions of sale refers to payment terms and

producer guarantees. Most producers grant cash
discounts to distributors for early payment.
Producers might also guarantee distributors
against defective merchandise of price declines.
 Terms and Responsibilities of
channel Members (contd.)
Distributors’ territorial rights define the
distributors’ territories and the terms under
which the producer will enfranchise other
distributors. Distributors normally expect to
receive full credit for all sales in their territory,
whether or not they did the selling.

Mutual services and responsibilities are

conditions that must be carefully spelled out,
especially in franchised and exclusive-agency
channels.
Evaluating the Major Alternatives

Each Channel alternative needs to be

evaluated against three criteria,

1. Economic
2. Control
3. Adaptive
 Economic Criteria
1. Determine whether a company sales force or a
sales agency will produce more sales.
Company Sales Force Sales Agency
 Concentrate on the
company’s products  Have 30 representatives
 They are better trained not just 10
to sell those products  Might be just as
 They are more aggressive as a direct
aggressive because their sales force, depending on
future depends on the the commission level
company’s success  Some consumers prefer
 They are more dealing with agents as
successful because many they represent several
customers prefer to deal manufacturers
directly with the  have extensive contacts
company and marketplace
knowledge
 Economic Criteria

2. Estimating the cost of selling different

volumes through each channel.
Selling Costs (dollars)

Manufacturer’s sales
agency
Company Sales
force

SB
Level of sales (dollars)
 Economic Criteria

3. Comparing sales and costs

Sales agency is the better channel for any

sales volume below SB

The company sales branch is better at

any volume above SB.
 Control Criteria

Using a sales agency poses some

control problem:
2. Agents may concentrate on the
customers who buy the most not
necessarily of the manufacturer’s
goods
3. Agents might not master the technical
details of the company’s product or
handle its promotion materials
effectively
 Adaptive Criteria
To develop a channel, members must
make some degree of commitment to
each other for a specified period of
time. Yet these commitments
invariably lead to a decrease in the
producer’s ability to respond to a
changing marketplace. In rapidly
changing, volatile or uncertain
product markets, the producer needs
channel structures and policies that
provide high adaptability
 Channel-Management
Decisions

After a company has chosen a

channel alternative,
individual intermediaries
must be selected,
trained,
motivated and evaluated.
Selecting Channel Members
The characteristics that are considered to
distinguish better intermediaries:
Years in business
Other lines carried
Growth and profit record
Solvency
Cooperativeness
reputation
 Selecting Channel Members
(contd.)
If the intermediaries are sales agents:
The size and quality of the sales force
If the intermediaries are department
stores:
Locations, future growth potential and
type of clientele
 Training Channel
Members
Why do the companies train
the distributors and dealers:
Because the intermediaries
will be viewed as the company
by end users.
Motivating Channel Members
A company needs to view its intermediaries
in the same way that it views its end users.
The company needs to determine
intermediaries’ needs and construct a channel
positioning such that its channel offering is
tailored to provide superior value to these
intermediaries
The company should provide training
programs, market research programs and
other capability-building programs to improve
intermediaries’ performance.
The company must constantly communicate
its view that the intermediaries are partners in
the joint effort to satisfy end-using consumers.
 Motivating Channel
Members (contd.)
Producers can draw on the following types of
power to elicit cooperation from the distributors:
 Coercive power occurs when the manufacturer
threatens to withdraw a resource or terminate a
relationship if intermediaries are highly dependent
upon the manufacturer. But the exercise of coercive
power produces resentment and can lead the
intermediaries to organize countervailing power
 Reward Power occurs when the manufacturer
offers intermediaries an extra benefit for
performing specific acts or functions. Reward
power typically produces better results than
coercive power but can be overrated.
Motivating Channel Members
(contd.)
3. Legitimate power is wielded when the
manufacturer requests a behavior that is
warranted under the contract. As long as the
intermediaries view the manufacturer as a
legitimate leader, legitimate power works.
 Expert power can be applied when the
manufacturer has special knowledge that the
intermediaries value. This is an effective
form of power if intermediaries would
perform poorly without this help.
 Referent power occurs when the
manufacturer is so highly respected that
intermediaries are proud to be associated.
 Motivating Channel
Members (contd.)
Manufacturers will gain
cooperation best if they would
resort to referent power, expert
power, legitimate power and
generally avoid using coercive
power
Motivating Channel Members
(contd.)
 Intermediaries can aim for a relationship based on
cooperation, partnership or distribution
programming.
 Most producers see the main challenge as gaining
intermediaries’ cooperation.
 Producers often use positive motivation like, higher
margins, special deals, premiums, cooperative
advertising, allowances, display allowances and
sales contests.
 At times producers can apply negative sanctions
like, threatening to reduce margins, slow down
delivery, or terminate the relationship. The
weakness of this approach is that the producer is
using crude stimulus-response thinking.
 More sophisticated companies try to forge a long-
term partnership with distributors.
Motivating Channel Members
(contd.)
 The most advanced supply-distributor arrangement
is distribution programming, which can be define as
building a planned, professionally managed,
vertical marketing system that meets the needs of
both manufacturer and distributors.
 The manufacturer establishes a department within
the company called distributor-relations planning.
Its job is to identify distributor needs and build up
merchandising programs to help each distributor
operate as efficiently as possible.
 This department and the distributors jointly plan
merchandising goals, inventory levels, space and
visual merchandising plans, sales-training
requirements, and advertising and promotion plans.
Evaluation Channel Members
Producers must periodically
evaluate intermediaries’
performance against such standards
as sales-quota attainment, average
inventory levels, customer delivery
time, treatment of damaged and lost
goods,and cooperation in
promotional and training programs.
 Modifying Channel
Arrangements
A Producer must periodically review and
modify its channel arrangements.
Modification becomes necessary when
the distribution channel is not working as
planned, consumer buying patterns
change, the market expands, new
competition arises, innovative
distribution channels emerge and the
product moves into later stages in the
product life cycle.
 Modifying Channel
Arrangements (Contd.)
No marketing channel will remain effective over the whole product
life cycle. Miland Lele developed the grid to show how marketing
channels have changed for PCs and designer appearel at different
stages in the PLC.

Value added by the channel

High Low
1. Introductory 4. Declining
Market growth rate
Low

-PC’s: hobbyist store -PC’s: mail order

-Designer apparel: -Designer apparel: off-price
boutiques stores
2. Growing 3. Mature
-PC’s: specialty retailers -PC’s: mass merchandisers
High

-Designer apparel: better -Designer apparel: mass

department stores merchandisers
 Modifying Channel
Arrangements (contd.)
Stern and sturdivant have outlined an excellent
framework, called Customer Driven Distribution System
Design.
Six steps are involved:
3. Research target customers’ value perceptions, needs, and
desires regarding channel service outputs
4. Examine the performance of the company’s and
competitors’ existing distribution systems in relation to
customer desires
5. Find service output gaps that need corrective action
6. Identify major constraints that will limit possible
corrective actions
7. Design a “managemetn-bounded” channel solution
8. Implement the reconfigured distribution system
 Channel Dynamics
Distribution Channels do not
stand still. New wholesaling and
retailing institution emerges and
new channel systems evolve like:
 Vertical
 Horizontal
 Multichannel
Vertical Marketing Systems
 A vertical marketing system
comprises the producer,
wholesaler(s), and retailer(s)
acting as a unified system.
 One channel member (producer,
wholesaler, retailer), the channel
captain owns the others or
franchises them or has so much
power that they all cooperate.
Vertical Marketing Systems
(contd.)

There are three types of Vertical

Marketing System:

3. Corporate
4. Administered
5. Contractual
 Vertical Marketing Systems
(Contd.)
1. Corporate VMS: Combines successive stages
of Production and distribution under single
ownership. Vertical integration is preferred
by the companies that desire a high level of
control over their channels.
2. Administered VMS: coordinates successive
stages of production and distribution
through the size and power of one of the
members. Manufacturers of a dominant
brand are able to secure strong trade
cooperation and support from resellers.
Vertical Marketing Systems
(Contd.)
Contractual VMS: consists of independent firms
at different levels of production and
distribution integrating their programs on a
contractual basis to obtain more economies or
sales impact than they could achieve alone.
Johnstone and Lawrence call them “value
adding partnership (VAP).
Contractual VMS are of three types:
1. Wholesaler sponsored voluntary chains
2. Retailer cooperatives
3. Franchise organizations
Vertical Marketing Systems
(Contd.)
 The traditional system is the
Manufacturer-sponsored retailer
franchise
 Another is the Manufacturer-
sponsored wholesaler franchise
 A newer system is the service-firm-
sponsored retailer franchise
 The new competition in
retailing
 Many independent retailers that have not
joined VMSs have developed specialty stores
that serve special market segments. The
result is a polarization in retailing between
large vertical marketing organizations and
independent specialty stores.
 This development creates a problem for the
manufacturers. They are strongly tied to
independent intermediaries, which they
cannot easily give up. But they must
eventually realign themselves with the high-
growth vertical marketing systems on less
attractive terms.
 The new competition in
retailing (contd.)
 Furthermore, vertical marketing
systems constantly threaten to bypass
large manufacturers and set up their
own manufacturing.
 The new competition in retailing is no
longer between independent business
units but between whole systems of
centrally programmed networks
competing against one another to
achieve the best cost economics and
customer response.
Horizontal Marketing System
 In horizontal marketing system,
two or more unrelated companies
put together resource or programs
to exploit an emerging marketing
opportunity.
 Each company lacks the capital,
know-how, production or
marketing resources to venture
alone.
Roles of Individual Firms in a
channel
 Insiders
 Strivers
 Complementers
 Transients
 Outside innovators
Channel Cooperation, Conflict,
and Competition
Types of conflict and competition:
 Vertical conflict
 Horizontal conflict
 multichannel conflict
Causes of Channel Conflict:
 Goal incompatibility
 Unclear roles and rights
 Differences in perception
 Great dependence
Channel Cooperation, Conflict,
and Competition
Managing Channel Conflict:
 Super ordinate goals
 Exchange of persons
 Cooperation
 Joint membership in and between
trade associations
Channel Cooperation, Conflict,
and Competition
Legal and Ethical Issues in channel
relations:
 Exclusive dealing
 Exclusive Territories
 Tying Agreements
 Dealer’s rights