Chapter 1

MARKETING CHANNEL CONCEPTS

MM 103 – DISTRIBUTION MANAGEMENT
 LEARNING OBJECTIVES
• realize that new internet based technologies have created a metamorphosis in
marketing channels and distribution systems.
• recognize that today's customers expect more choices as to how, when and where
products and services are made available to them.
• be aware of the need for multi-channel strategies and structures to satisfy
heightened customer expectations for channel choice.
• understand the definition of marketing channel from a managerial perspective.
• see how marketing channels relate to the other strategic variables in the marketing
mix.
• know the flows in marketing channels and how they relate to channel management.
• understand the principles of specialization and division of labor as well as contactual
efficiency in marketing channels.
• be familiar with the concepts of channel structure and ancillary structure and
recognize the difference between them.
 1. THE MULTI-CHANNEL CHALLENGE
• Finding the optimal multi-channel mix
• Creating multi-channel synergies
• Avoiding multi-channel conflicts
• Gaining a sustainable competitive advantage via multi-
channel strategy
 1.1 AN OPTIMAL MULTI-CHANNEL MIX
Internet-based online channels have become a
mainstream channel in the channel mixes of a vast number
of firms that may also use several other channels such as:
• Retail channel stores
• Mail order channels
• Wholesale distributor channels
• Sales representative channels
• Call center channels
• Company sales force channels
• Vending mahine channels
• Company-owned retail store channels
1.1 AN OPTIMAL MULTI-CHANNEL MIX
1.1 AN OPTIMAL MULTI-CHANNEL MIX
 1.2 MULTI-CHANNEL SYNERGIES
In the context of multi-channel strategy, synergy means using
one channel to enhance the effectiveness and efficiency of other
channels in the mix. Using online channels to obtain information
about a product before purchasing it in conventional “brick and
mortar” channels is a common example of multi-channel synergy.
1.3 AVOIDING MULTI-CHANNEL CONFLICT
A major obstacle to developing successful multi-channel
strategies is the emergence of conflict between different channels
used for reaching the same customers. For example, if a
manufacturer sells directly via its online channel or field sales
force to the same customers served by independent distributors,
the distributors may very well view te online and field sales force
channels as taking business away from their channel.
 1.4 SUSTAINABLE COMPETITIVE ADVANTAGE
AND MULTI-CHANNEL STRATEGY
A sustainable competitive advantage is a competitive
edge that cannot be quickly or easily copied by competitors.
In today's global competitive arena, gaining a sustainable
competitive advantage by emphasizing the first three Ps of
marketing mix (product, price, and promotion) has become
more difficult.
2. THE MARKETING CHANNEL DEFINED
Marketing channel may be defined as “the external
contactual organization that management operates to
achieve its distribution objectives.”
Four terms in this definition should be especially
noted:
external
contactual organization
operates
distribution objectives
2. THE MARKETING CHANNEL DEFINED
The term external means that the marketing channel
exists outside the firm. In other words, it is not part of a
firm’s internal organizational structure.
Management of the marketing channel therefore
involves the use of interorganizational management
(managing more that one firm) rather than
intraorganizational management (managing one firm).
2. THE MARKETING CHANNEL DEFINED
The term contactual organization refers to those firms or
parties who are involved in negotiatory functions as a product or
service moves from the producer to its ultimate user. Negotiatory
functions consist of buying, selling, and transferring title to products
or services. Only those firms or parties that engage in these
functions are members of the marketing channel.
Other firms (usually referred to as facilitating agencies) such
as transportation companies, public warehouses, banks, insurance
companies, advertising agencies, and the like, that perform
functions other than negotiatory, are excluded.
2. THE MARKETING CHANNEL DEFINED
The third term, operates, suggests 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.
2. THE MARKETING CHANNEL DEFINED
Finally, distribution objectives, the fourth key term in
the definition, means that management has certain
distribution goals in mind. The marketing channel exists as
a means for reaching these. The structure and
management of the marketing channel are thus in part a
function of a firm’s distribution objectives.
2.1 THE USE OF THE TERM CHANNEL MANAGER

The use of the term channel manager:

Channel manager refers to anyone in a firm or
organization who is involved in marketing channel decision
making.
In practice, relatively few firms or organizations
actually have a single designated executive position called
channel manager. However, some major firms have
executive positions where the duties are similar to those of
the channel manager as defined here.
2.1 THE USE OF THE TERM CHANNEL MANAGER
 2.2 MARKETING CHANNELS AND MARKETING
MANAGEMENT STRATEGY
ed The classic marketing mix
strategy model provides the framework
for viewing the marketing channel from
a marketing management perspective.
The marketing mix model
portrays the marketing management
process as a strategic blending of four
controllable marketing variables (the
marketing mix) to meet the demands of
customers to which the firm wishes to
appeal (the target markets) in light of
internal and external uncontrollable
variables.
 2.3 CHANNEL STRATEGY VS. LOGISTICS
MANAGEMENT
Channel strategy fits under the distribution variable of
the marketing mix. Logistics management also fits under
this variable—and the two components (channel strategy
and logistics management) together comprise the
distribution variable of the marketing mix
2.3 CHANNEL STRATEGY VS. LOGISTICS
MANAGEMENT
 2.3 CHANNEL STRATEGY VS. LOGISTICS
MANAGEMENT
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 contactual organization that is
responsible for meeting the firm’s distribution objectives. Logistics
management, on the other hand, is more narrowly focused on
providing 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.
 2.4 FLOWS IN THE MARKETING CHANNEL

When a marketing channel has been developed, a series of

flows emerges. These flows provide the links that tie channel
members and other agencies together in the distribution of goods
and services. From the standpoints of channel strategy and
management, the most important of these flows are:
PRODUCT FLOW
NEGOTIATION FLOW
OWNERSHIP FLOW
INFORMATION FLOW
PROMOTION FLOW
 2.4 FLOWS IN THE MARKETING CHANNEL

Product flow refers to the actual physical movement

of the product from the manufacturer through all of the
parties who take physical possession of the product, from
its point of production to final consumers.
 2.4 FLOWS IN THE MARKETING CHANNEL

Negotiation flow represents the interplay of the

buying and selling functions associated with the transfer of
title (right of ownership) to products.
 2.4 FLOWS IN THE MARKETING CHANNEL

Ownership flow shows the movement of the title to

the product as it is passed along from the manufacturer to
final consumers.
 2.4 FLOWS IN THE MARKETING CHANNEL

Information flow refers to the two-directional flow of

information among parties in the distribution channel. All parties
participate in the exchange of information and the flow can be from
the manufacturer to consumers and vice versa.
 2.4 FLOWS IN THE MARKETING CHANNEL

Promotion flow refers to the flow of persuasive

communication in the form of advertising, personal selling,
sales promotion, and publicity.
2.4 FLOWS IN THE MARKETING CHANNEL
2.5 DISTRIBUTION THROUGH INTERMEDIARIES

Why do intermediaries so often stand between

producers and the ultimate users of products?
DISINTERMEDIATION – “eliminate the middlemen”
The thinking underlying disintermediation is based on
the awesome technological capacity of the Internet to
connect everybody to everybody else, including all
producers with final consumers.
 2.6 SPECIALIZATION/DIVISION OF LABOR

Adam Smith, in his book “The Wealth of Nations”,

cited an example from a pin factory. He noted that when the
production operations necessary in the manufacture of pins
were allocated among a group of workers so that each
worker specialized in performing only one operation, a vast
increase in output resulted over what was possible when
this same number of workers individually performed all of
the operations.
2.6 SPECIALIZATION/DIVISION OF LABOR
The only difference in the
application of the specialization and
division of labor concept, as applied to
production versus distribution, is that
the production tasks have been
allocated intraorganizationally whereas
the distribution tasks have been
allocated interorganizationally.
 2.7 CONTACTUAL EFFICIENCY

Contactual efficiency is the level of negotiation effort

between sellers and buyers relative to achieving a
distribution objective. Thus, it is a relationship between an
input (negotiation effort) and an output (the distribution
objective).
2.7 CONTACTUAL EFFICIENCY
2.7 CONTACTUAL EFFICIENCY
This example points to an
important relationship between
contactual efficiency and the
use of intermediaries. The use
of additional intermediaries will
often increase the level of
contactual efficiency.
 2.7 CONTACTUAL EFFICIENCY

This does not mean that considerations of contactual

efficiency and specialization and division of labor are all that
is needed to make a decision on intermediary usage. Many
other variables must also be evaluated. But contactual
efficiency and specialization and division of labor provide
the channel manager with a basic framework for
incorporating these other variables into decisions on the
use of intermediaries.
 2.8 CHANNEL STRUCTURE

Channel structure is the group of channel members

to which a set of distribution tasks has been allocated.
This definition suggests that in
developing channel structure,
the channel manager is faced
with an allocation decision; that
is, given a set of distribution
tasks that must be performed to
accomplish a firm’s distribution
objectives, the manager must
decide how to allocate or
structure the tasks. Thus, the
structure of the channel will
reflect the manner in which he
or she has allocated these
tasks among the members of
the channel.
END of CHAPTER 1