SDM

The document “Designing Channels of Distribution” by Professor V. Kasturi Rangan outlines a

framework for effectively designing distribution channels, particularly for new product launches in
industrial markets. Here’s a detailed explanation of the document’s main concepts:

1. Importance of Channel Selection

Launching a new product successfully is critical for businesses to maintain market leadership, but
many new products fail to meet financial and marketing goals. A key reason for these failures is the
improper selection and management of distribution channels. This document provides a systematic
method to evaluate, plan, and execute channel decisions.
2. The Channel Design Framework
The framework presented focuses on several steps, starting with the identification of customer
segments and channel functions and culminating in the selection of the most effective distribution
channels. The steps are:

• Step 1: Identify Customer Segments

• Understanding the needs of homogeneous customer segments is the first step. The
focus should be on end-users rather than intermediaries.

• Example: A company selling agricultural chemicals should target farmers, not

dealers.

• Step 2: Identify and Prioritize Channel Functions

• Channel functions like product information, customization, quality assurance, lot size,
and after-sales service must be identified based on customer needs. These functions vary
by industry and product type.

• The data gathering in this step is essential and should involve potential customers or
expert opinions, particularly for new products.

• Step 3: Benchmark Channel Capabilities

• The next step involves comparing the company’s current channel capabilities with
those of its competitors. This helps in understanding where improvements are necessary
to meet customer requirements.

• Example: A company using distributors may need to add direct sales capabilities to
meet customers’ needs for technical support.

• Step 4: Generate Channel Alternatives

• Multiple channel alternatives should be generated, which may involve different

combinations of salesforces, distributors, and agents. This step focuses on creatively
exploring options without worrying about constraints such as cost or channel conflict at
this stage.

• Step 5: Evaluate Costs and Benefits

 • Each channel option is then evaluated based on its costs and benefits, taking into
account factors like revenues, market penetration, transaction costs, and customer
satisfaction.

• Step 6: Consider Synergies and Conflicts in Multi-Market Businesses

• For businesses with multiple products or markets, it’s important to consider channel
overlaps, synergies, and potential conflicts between different channel strategies.
3. Channel Functions
The document identifies eight generic channel functions that need to be considered when designing
a distribution channel:

• Product Information: Customers often need detailed information, especially for complex or
new products.

• Product Customization: Some products require customization to meet specific customer

needs.

• Product Quality Assurance: Ensuring reliability is important, particularly in industries with

strict quality standards.

• Lot Size: The financial outlay for the customer, which influences purchasing decisions.

• Assortment: The need for a wide range of products.

• Availability: The importance of product availability and inventory management.

• After-Sales Service: Installation, repair, and maintenance support.

• Logistics: Complexity in transporting and delivering products.

4. Application Example: Scotchfiber
An illustrative example in the document involves a company launching a new product, “Scotchfiber.”
Initially, management wanted to use their existing distributors to sell the product. However, after
following the outlined channel design process, it became clear that these distributors would not meet
customer needs for technical information and product customization. Instead, a hybrid approach
using both the company’s salesforce and general-line distributors was chosen, which proved
successful.
5. Conclusion
The document highlights that successful channel design involves integrating customer needs with
expert opinions and benchmarking against competitors. This method not only helps in selecting
appropriate channels for new products but also provides valuable insights for managing and
improving existing distribution channels.

Distribution channels refer to the pathways or intermediaries through which goods and services
travel from the manufacturer to the end customer. Different types of distribution channels exist based
on the complexity, efficiency, and control companies seek over their distribution network. Here are
the most common types of distribution channels:
1. Direct Distribution Channel
 • Definition: In a direct distribution channel, manufacturers or producers sell products directly
to the consumer without any intermediaries.

• Example: A bakery selling cakes directly to customers in-store or online.

• Advantages:

• Full control over the brand experience.

• Higher profit margins by eliminating middlemen.

• Direct customer feedback.

• Disadvantages:

• Can be resource-intensive, requiring infrastructure for sales, marketing, and logistics.

2. Indirect Distribution Channel

• Definition: This involves one or more intermediaries between the manufacturer and the
customer. The intermediaries could be wholesalers, distributors, or retailers.

• Types of Intermediaries:

• Wholesalers: Buy goods in large quantities from manufacturers and sell them to
retailers or other distributors.

• Retailers: Purchase goods from wholesalers or directly from manufacturers and sell
them to consumers.

• Agents/Brokers: They do not take ownership of the products but facilitate the sale
between manufacturers and buyers, usually for a commission.

• Advantages:

• Wider reach and easier access to new markets.

• Reduces logistical and operational burden on the producer.

• Disadvantages:

• Less control over branding and customer interaction.

• Profit margins are reduced due to middlemen fees.

3. Dual Distribution

• Definition: A combination of both direct and indirect distribution channels. The manufacturer
uses multiple channels to reach the same target market.

• Example: Apple sells its products directly through its website and retail stores but also sells
through authorized resellers like Best Buy or Amazon.

• Advantages:

• Increases market reach and availability of products.

 • Flexibility in reaching different customer segments.

• Disadvantages:

• Potential channel conflict when direct and indirect channels compete for the same
customers.
4. Reverse Distribution Channels

• Definition: In reverse channels, products flow from the consumer back to the manufacturer,
typically for returns, recycling, or disposal.

• Example: Electronics companies offering take-back programs for recycling old devices.

• Advantages:

• Supports sustainability and corporate social responsibility initiatives.

• Helps with product refurbishment and resale, reducing waste.

• Disadvantages:

• Can be logistically complex and costly to manage.

5. Hybrid Distribution Channels

• Definition: Similar to dual distribution, hybrid channels involve the use of multiple types of
distribution strategies to target various market segments, but they could differ in their
approaches (e.g., digital channels combined with brick-and-mortar stores).

• Example: A company selling directly to consumers via its website, using third-party
e-commerce platforms like Amazon, and partnering with physical retail stores.

• Advantages:

• Provides flexibility and optimizes distribution based on customer preferences.

• Helps in hedging against risks from relying on a single distribution channel.

• Disadvantages:

• Channel management complexity.

• Potential risk of brand dilution if not managed carefully.

6. Intensive Distribution

• Definition: This involves placing products in as many outlets as possible to maximize

availability and exposure. It is commonly used for products with high demand or impulse
purchases.

• Example: Soft drinks and snacks available in grocery stores, vending machines, and
convenience stores.

• Advantages:
 • Maximizes product visibility and market penetration.

• Higher potential sales volume.

• Disadvantages:

• Less control over product placement and brand image.

• May lead to over-saturation in some markets.

7. Selective Distribution

• Definition: This involves choosing a limited number of retailers or distributors to sell

products. It’s often used for products that require a certain level of service or expertise.

• Example: High-end electronics or fashion brands that are sold in select stores.

• Advantages:

• More control over brand positioning and customer experience.

• Ensures product quality and service standards are maintained.

• Disadvantages:

• Limited market reach compared to intensive distribution.

• Risk of losing potential customers who cannot access the product easily.
8. Exclusive Distribution

• Definition: A very restrictive distribution strategy where a product is sold through a single
distributor or retailer in a specific geographic area or market.

• Example: Luxury brands like Rolex or Ferrari that maintain exclusivity through selected
dealerships.

• Advantages:

• Creates an exclusive image and perception of scarcity.

• Greater control over pricing, promotions, and brand experience.

• Disadvantages:

• Limited market access.

• High reliance on the performance of selected distributors.

9. Franchising

• Definition: Franchising allows an individual (franchisee) to operate a business using the

branding and business model of a larger company (franchisor).

• Example: McDonald’s or Subway franchises.

• Advantages:
 • Quick expansion of the brand with less capital investment from the franchisor.

• Franchisees are motivated as they are running their own business under a trusted
brand.

• Disadvantages:

• Limited control over individual franchisees’ operations.

• Brand image can be impacted by poorly performing franchisees.

10. Digital Distribution Channels

• Definition: Involves the sale of products or services online, typically through e-commerce
platforms or direct websites.

• Example: Amazon, Etsy, and company-specific websites.

• Advantages:

• Lower costs compared to physical stores.

• Broader reach with the potential for global sales.

• Disadvantages:

• Highly competitive with challenges in building customer trust.

• Requires significant digital marketing investment.

Summary of Channel Types

1. Direct: Manufacturer → Consumer.

2. Indirect: Manufacturer → Wholesaler → Retailer → Consumer.

3. Dual: Combination of direct and indirect channels.

4. Reverse: Consumer → Manufacturer (for returns or recycling).

5. Hybrid: Various channels to reach different market segments.

6. Intensive: Products are placed in many outlets.

7. Selective: Products are sold through limited outlets.

8. Exclusive: Products are sold through one or very few outlets in a region.

9. Franchising: Franchisee operates under the brand and model of a franchisor.

10. Digital: Products sold online via e-commerce platforms.

Each distribution channel offers distinct advantages and challenges, and companies often select a
channel strategy that aligns with their business objectives, target market, and product
characteristics.

1. Overview of Sales and Distribution Management

 • Changing Role of Sales and Distribution:

• Sales is no longer just about selling products; it’s about building relationships, solving
customer problems, and ensuring long-term satisfaction.

• Disruption from technological advancements (AI, online platforms) has significantly

transformed how sales functions operate.

• Customer expectations have evolved, demanding more personalized service and

faster solutions, making sales and distribution highly customer-oriented.

• Sales and Distribution in the Marketing Mix:

• Sales and distribution are key to ensuring that products are available to customers
when and where they need them.

• Distribution involves logistical management, ensuring efficient product flow from

manufacturer to customer, while sales focuses on engagement and conversion.

• Impact of Globalization and Technology:

• The shift toward web-based sales models is critical, as it allows companies to scale
faster, automate processes, and provide global reach.

• AI and machine learning are driving changes in sales strategies by optimizing lead
generation, personalization, and customer support.

• Key Reading: HBR Note on Personal Selling and Sales Management.

2. The Selling Process (B2B and B2C)

• Pre-Selling Activities:

• Researching potential customers (prospecting) to understand their needs.

• Developing a customized sales approach tailored to the customer’s problems and

industry.

• Selling Process (B2B and B2C):

• B2B (Business-to-Business): Focuses on long-term relationships, larger transaction

sizes, and often involves complex negotiations.

• B2C (Business-to-Consumer): Quicker sales cycle, smaller transaction sizes, usually

relies on emotional or impulse decisions.

• In both cases, the salesperson must listen to customer needs, present the value
proposition, and overcome objections to close the deal.

• Post-Selling Activities:

• After the sale, maintaining the relationship is key through follow-up, ensuring the
customer is satisfied, and offering after-sales support.
 • Building this relationship can lead to repeat business and positive word-of-mouth,
essential for both B2B and B2C contexts.

• Sales Models:

• SPIN Selling: A questioning model to uncover customer needs (Situation, Problem,

Implication, Need-Payoff).

• Sandler’s Selling System: A process that emphasizes uncovering pain points

before presenting the solution.

• Key Case: Siebel Systems: Anatomy of a Sale.

3. Art of Negotiation

• Core Concepts of Negotiation:

• Negotiation is about achieving a win-win outcome for both parties. This requires
understanding the customer’s needs and balancing them with your own objectives.

• BATNA (Best Alternative to a Negotiated Agreement) is an essential tool for a

negotiator. Knowing your fallback options helps you maintain leverage during
negotiations.

• Negotiation Process:

• Preparation: Researching the needs and positions of both parties.

• Bargaining: Presenting offers, counter-offers, and finding common ground.

• Closing: Finalizing the terms and securing the deal.

• Handling Objections and Closing Deals:

• Successful negotiations require skill in handling objections. Objections are often

signals that the buyer needs more information or reassurances.

• Using methods like the Funneling technique (asking probing questions) helps break
down objections.

• Role Play Exercises:

• Real-world negotiation practice is critical for salespeople to refine their ability to think
on their feet and adjust strategies dynamically during negotiations.
4. Managing the Sales Function

• Sales Structure:

• Companies organize their sales force based on various structures such as:

• Geographical: Assigning territories to salespeople.

• Product-Based: Specializing in selling specific product lines.

 • Customer/Industry-Based: Focusing on specific customer segments or
industries (e.g., healthcare, technology).

• Sales Leadership:

• Sales managers are responsible for recruiting, training, and leading the salesforce.
Their leadership style can greatly affect team performance.

• Effective leadership involves setting clear goals, providing motivation, and giving
constructive feedback to improve performance.

• Monitoring and Evaluation:

• Sales managers must regularly assess performance metrics such as sales volume,
conversion rates, and customer satisfaction.

• Adjusting strategies based on these evaluations ensures that the team is

continuously improving.

• Key Case: Lakshmi Projects.

5. Customer-Centric Sales

• Understanding Customer Needs:

• The shift towards customer-centric sales requires deep insight into the specific needs
and pain points of each customer.

• Tools like customer segmentation and market research help companies create
tailored solutions that provide maximum value to the customer.

• Building Customer Relationships:

• Long-term relationships are built through trust and consistent follow-up. Sales teams
need to focus on solving customer problems rather than just making one-time
transactions.

• Customer-Focused Solutions:

• Offering value beyond the product or service (e.g., consulting, after-sales support)
helps create lasting relationships.
6. Sales Forecasting and Market Potential

• Importance of Forecasting:

• Forecasting helps businesses predict future sales, manage inventory, and plan their
budgets. Accurate forecasting is crucial for aligning supply with demand and avoiding
stockouts or overproduction.

• Sales Quotas:

• Quotas set measurable goals for sales teams and can be based on historical sales
data, market conditions, or individual salesperson performance.
 • By setting achievable but challenging quotas, managers can drive performance while
maintaining morale.

• Predictive Analytics:

• Predictive models use data analytics to identify trends and predict customer
behavior. This helps in more accurate forecasting and quota setting.

• Companies can use data from customer interactions, previous sales cycles, and
market trends to predict future sales and allocate resources effectively.

• Market Gap Analysis:

• This involves identifying areas where there is unmet demand or untapped market
potential. By filling these gaps, companies can expand their market share and gain a
competitive advantage.

• Key Case: Parkin Laboratories: Sales Force Target Dilemma.

7. Direct Selling and Sales Force Management

• Direct Selling Models:

• Companies like Amway or Tupperware use direct sales, where products are sold
directly to consumers through personal networks or home parties, bypassing traditional
retail outlets.

• Multi-Level Marketing (MLM) is a common model where independent salespeople

earn commissions not only on their sales but also on the sales made by their recruits.

• Sales Force Compensation:

• Compensation packages often include base salary plus commissions.

High-performing salespeople can earn additional bonuses or rewards, which serves as
strong motivation.

• Balancing intrinsic motivation (e.g., job satisfaction) with extrinsic rewards (e.g.,
money, promotions) is key to maintaining a motivated sales force.

• Motivation and Leadership:

• Salespeople often face many rejections, making motivation critical. Providing

constant feedback, recognition, and career development opportunities can keep the team
engaged.

• Key Case: Mary Kay Cosmetics: Sales Force Incentive (A).

8. Territory Management

• Determining Sales Territories:

• Territories are assigned based on geographic locations, customer density, or industry

sectors. Proper allocation ensures optimal coverage and helps avoid overloading sales
reps or leaving markets underserved.
 • Coverage Planning:

• Companies must decide whether to pursue extensive coverage (broad reach across
all potential customers) or intensive coverage (deep engagement with fewer, more
lucrative customers).

• Profit-Oriented Territory Management ensures resources are allocated to regions

that promise the highest returns.

• Developing New Markets:

• Expanding into new territories requires careful market research, identifying customer
needs, and ensuring that infrastructure is in place to support sales efforts.

• Key Case: Garrick Oils Case.

9. Distribution Channel Design

• Designing Effective Distribution Channels:

• Choosing the right channels depends on the company’s goals, customer

preferences, and the product type. Channels can be direct (selling directly to the
customer) or indirect (using intermediaries like wholesalers, retailers).

• Hybrid models combine both approaches to maximize reach while maintaining

some level of control.

• Factors Affecting Distribution Channel Selection:

• Cost: Companies must balance the cost of the channel with the revenue potential.

• Reach: Channels should provide access to the largest possible customer base.

• Control: Some channels (like direct sales) allow more control over the brand and
customer experience, while others (like retailers) provide less control.

• Key Case: Castrol.

10. Managing Channel Conflict (continued)

• Channel Power and Conflict Resolution:

• Channel power refers to the ability of one member in the distribution chain to
influence another. For example, a powerful retailer might demand better terms from a
supplier due to their market position.

• Resolving channel conflicts often involves managing these power dynamics and
ensuring that all channel members see value in continuing the partnership.

• Conflict resolution can be achieved through strategies like differentiation,

segmentation, or offering exclusive deals/products to certain channels to prevent overlap.
 • Additionally, fostering open communication and providing clear guidelines for all
channel members can help minimize conflicts.

• Interpreting Channel Behavior:

• Understanding the behaviors and motivations of channel partners is crucial to

managing relationships effectively. Each intermediary in the distribution channel may have
different goals (e.g., maximizing profit, providing customer service, etc.), and aligning
these goals with the overall business strategy is essential.

• ROI Approach for Conflict Resolution:

• Using a return on investment (ROI) approach to resolve conflicts can be beneficial.

Companies need to assess whether the potential gains from resolving a conflict outweigh
the costs associated with the resolution process.

• Key Reading: Channel Conflict: When it is Dangerous.

• Case Study: The Irate Distributor.

11. Sales and Distribution through E-Channels

• E-Commerce and Online Selling:

• E-channels, such as online stores and digital platforms, have transformed the way
businesses sell products. Companies can now reach customers worldwide, reduce
operational costs, and offer a seamless shopping experience without the need for
physical stores.

• Many traditional companies are shifting towards omnichannel strategies, integrating

both physical stores and online platforms to provide customers with a consistent
experience.

• Cash and Carry:

• This is a wholesale model where businesses (retailers or small businesses) purchase

goods in large quantities and take immediate possession (cash and carry). It’s commonly
used by retailers to stock their stores.

• Conflict Between Conventional and Modern Channels:

• With the rise of e-commerce, traditional brick-and-mortar stores often feel the
pressure of losing customers to online competitors. Managing this conflict requires careful
integration of both channels, ensuring that the company provides unique value through
each.

• Case Example: Companies like Uber, Airbnb, and Etsy initially faced challenges in building
their customer base, but they successfully navigated these challenges by leveraging digital
marketing, influencer outreach, and early adopter programs.

• Key Reading: How Uber, Airbnb, and Etsy Attracted Their First 1,000 Customers.
12. Territory Management
 • Defining and Managing Sales Territories:

• A sales territory is a specific geographic area or customer segment assigned to a

sales team or individual. The purpose of territory management is to ensure adequate
coverage of all customers and prospects while optimizing resources.

• Territories can be managed based on customer density, potential market value, or

other strategic factors.

• Territory Load Planning:

• This involves balancing the workload across the sales team. Sales territories should
be structured so that no single salesperson is overwhelmed or underutilized.

• Load planning ensures that the sales team can efficiently cover their assigned
areas without compromising the quality of customer interaction.

• Developing New Markets:

• Expanding into new territories requires identifying untapped markets, ensuring

sufficient resources for exploration, and creating strategies for building brand awareness
in new regions.

• When entering new territories, sales managers must consider factors such as cultural
differences, regional regulations, and local competition.

• Profit-Oriented Territory Management:

• Sales teams should focus their efforts on high-potential territories that offer the
greatest return on investment. This involves careful analysis of the region’s market size,
customer demand, and the competitive landscape.

• Key Case: Garrick Oils Case.

13. Reviewing Sales Performance and Evaluating Sales Force

• Key Performance Indicators (KPIs):

• Sales managers need to regularly evaluate the performance of their sales teams
using KPIs such as sales growth, customer acquisition rates, lead conversion rates, and
customer satisfaction.

• Other metrics include revenue per salesperson, territory coverage, and the number
of sales calls made.

• Performance Reviews:

• Sales reviews help identify top performers and those who may need additional
training or support. Regular feedback sessions ensure continuous improvement in
individual and team performance.

• Setting clear Key Result Areas (KRAs) helps salespeople understand their
objectives and what they need to achieve to meet company goals.
 • Key Reading: The New Science of Sales Force Productivity.
14. Designing Distribution Channels

• Network Marketing:

• In network marketing, independent salespeople earn commissions not only for their
sales but also for sales made by their recruits. This is a multi-level marketing model used
by companies like Amway and Herbalife.

• While network marketing offers rapid growth potential, it requires careful

management to prevent channel conflict and ensure legal compliance.

• Channel Design Principles:

• When designing a distribution channel, businesses need to consider factors such as

cost, market reach, customer preferences, and the control they want over the brand and
customer experience.

• Distribution channel strategies often involve choosing between direct sales (from the
company to the consumer), indirect sales (through intermediaries), or a hybrid model.

• Case Example: Dunkin Donuts – Designing channels for both franchise operations and
corporate-owned stores.

• Key Reading: Designing Channels of Distribution.

15. Types of Intermediaries and Their Role

• Intermediaries in the Distribution Process:

• Intermediaries include wholesalers, retailers, brokers, and agents who help move
products from manufacturers to consumers. Each intermediary performs specific roles in
adding value to the distribution process.

• Wholesalers: Buy goods in bulk from manufacturers and sell them to retailers.

• Retailers: Sell directly to end consumers, either through physical stores or online.

• Brokers/Agents: Facilitate deals between buyers and sellers without taking

ownership of the products.

• Impact of Competition on Channels:

• Increased competition in certain industries has forced intermediaries to differentiate

themselves by providing better customer service, faster delivery, or enhanced product
knowledge.

• The rise of e-commerce has also led to changes in traditional intermediary roles, with
some companies bypassing intermediaries altogether to sell directly to customers (D2C
model).

• Legal Issues in Distribution:

 • Companies need to be aware of legal regulations surrounding distribution, such as
pricing policies, antitrust laws, and franchise agreements. Legal conflicts can arise if
companies exert undue control over pricing or restrict competition unfairly.

• Key Case: Castrol.

16. Managing Channel Conflict

• Channel Conflict Resolution Strategies:

• Conflict can arise between different types of channels (e.g., online vs. offline
retailers) or even between distributors and manufacturers. Proper management involves
identifying the root cause and taking steps to minimize its impact on overall sales
performance.

• Conflict can be resolved through negotiation, offering incentives to channel

members, or providing exclusive territories to reduce competition.

• ROI Approach to Conflict Resolution:

• In situations where channel conflict cannot be fully avoided, companies must assess
whether the potential benefits of resolving the conflict justify the costs involved.

• Interpreting Channel Behavior:

• Understanding how intermediaries behave in response to company actions,

customer demand, or market shifts is key to managing an effective distribution network.
Behavioral analysis helps predict and mitigate potential conflicts before they arise.

• Key Case: The Irate Distributor.

17. Sales & Distribution through E-Channels

• E-Commerce and Digital Channels:

• The rise of e-commerce has shifted traditional retail sales to online platforms. This
requires companies to rethink their distribution strategies, logistics, and customer service
models to cater to online customers.

• Drop Shipping: A popular e-commerce model where retailers don’t hold inventory
but instead have products shipped directly from the manufacturer to the customer.

• Resolving Conflicts Between Conventional and Modern Channels:

• Companies using both physical stores and online platforms often face channel
conflict, where physical stores feel undercut by online sales. Strategies like offering
exclusive products through each channel or integrating loyalty programs can help balance
these conflicts.

• Case Study: Companies like Amazon, Alibaba, and Zappos have successfully leveraged
digital channels for global market penetration.