Republic of the Philippines

Polytechnic University of the Philippines

Office of the Vice President for Academic Affairs
COLLEGE OF BUSINESS ADMINISTRATION
Department of Entrepreneurship
Sta. Mesa Manila

INSTRUCTIONAL MATERIAL FOR

DISTRIBUTION MANAGEMENT

(MARK 30023)

Compiled by:

Mary Shayne P. Soriano

PUP A. Mabini Campus, Anonas Street, Sta. Mesa, Manila 1016

Direct Line: 335-1730 | Trunk Line: 335-1787 or 335-1777 local 000
Website: www.pup.edu.ph | Email: [email protected]

THE COUNTRY’S 1st POLYTECHNIC

 (This instructional material for educational purposes only)

TABLE OF CONTENTS

Overview 3

Module Objectives 3

Grading System 3

Course Materials
Chapter 1 Channel Management / Distribution Strategy 4
and Marketing Mix
Chapter 2 Emergence of Marketing Channels 17
Chapter 3 Components of Marketing Channels 22
Chapter 4 Channel Management 30
Chapter 5 Marketing Channel 38
Chapter 6 Designing Marketing Channels 48
Chapter 7 Selecting Channel Partners 62
Chapter 8 Evaluating Channel Member Performance 71
Chapter 9 Context of Channel Management and Distribution 77

References 87

Distribution Management | MARK 30023 2

& OVERVIEW
Distribution management refers to the management of all activities’ movement and
coordination of supply and demand in the creation of time and place utility in goods. It is the art
and science of determining requirements in acquiring, distributing, and finally maintaining them
in an operationally ready condition for their entire lives.

It is composed of broad range of activities concerned with the efficient movement of finished
products from the end of the production line to the consumer in in some cases, it also includes
the movement of raw materials from the source of supply to the beginning of the production line
(p. 231 Sales and Distribution Management by Havaldar, K. & Cavale, V. 2012)

The course aims to equip students’ ability to choose proper channel in the distribution
strategy and to conceptualize effective mechanism on how to move products from the point of
production to the point of consumption considering the present environmental situation both
from the Macro-environment and Micro-environment forces. It also aims students to learn the
significant aspects of Channel Management and be able to identify the best channel members
to match into their products/services as well as areas of distribution to identify the distribution
pricing strategy along with other logistics financial considerations.

& MODULE OBJECTIVES

Upon the completion of this module, you will be able to:

• Design, implement, manage, and evaluate a channel distribution strategy;

• Optimize your options as to which channels of distribution to choose in appropriate
settings; and
• Demonstrate efficiency and understanding of the different channels to practice said
optimization.

& GRADING SYSTEM

Upon the completion of this module, you will be graded according to the below mentioned grading
system:

Class Standing:
• Quizzes
• Projects/Assignments/Seatwork

Class Standing x 2 + Midterm Exam = First Grading Grade

3

Distribution Management | MARK 30023 3

& COURSE MATERIALS
Lesson 1 : Channel Management / Distribution Strategy and Marketing Mix

Every manufacturer needs to distribute its products to customers and even to

consumers. Even the seller does it directly: an industrial manufacturer with a small number of
customers, or a supplier of components to a larger manufacturer, or very few manufacturers of
consumer goods.

The marketing mix is also referred to as the 4 Ps of marketing; it is a set of controllable

and interrelated variables composed of product, place, price and promotions that a company
assembles to satisfy a target group better than its competition.

At the end of this lesson, you should be able to:

• Recall the types of channel members and distribution channels

• Learn about the storage and distribution of products
• Recall the basics of marketing and be able to create strategies based on this knowledge

TYPES OF CHANNEL MEMBERS / TYPES OF DISTRIBUTION CHANNELS

A channel of distribution is made up of people or organizations involved in the
distribution process. It is any activity of firms or individuals who take part in the flow of goods
and services from manufacturer to final consumer or business user. They perform the work of
moving products from manufacturers to final consumers or business users.
As far as distribution is concerned, this may or may not be an issue in the marketing
services. However, where there are outlets, they are very important. They should be efficient,
but they must also be consistent with the overall product and its desired image.
These are examples of channel members:
1. Manufacturers – are the makers or producers of a final product

2. Service providers – are the ones who provide intangible products to gain satisfaction
from the customers

3. Wholesalers – are engaged in the activity of selling products to retailers, organizational

users, or other wholesalers and selling products for resale.

4. Retailers – are selling goods in small quantities directly to the consumer

5. Marketing Specialist – one who is an expert in the field of marketing

6. Consumers – are the final and ultimate users of the product

Distribution Management | MARK 30023 4

The term middlemen (who act as go-between the producer and consumer) refers to the
following
1. Wholesalers – they provide bulk quantity of products for resale

2. Retailers – they sell in individual pieces to the final users

3. Marketing Specialist – they provide expertise in the field of marketing

Basic Types of Distribution Channels

1. Direct channel distribution is the transfer or movement of goods and services from
manufacturer to final user or customer without the intervention of independent
middlemen. This refers to the channel or the intermediaries chosen when the firms want
to control the entire marketing programme. They have close contact with consumers and
have limited target markets.

2. Indirect channel of distribution is the transfer or movement of goods (or tangible

products) and services (or intangible goods) from the manufacturer (or producer) to
independent intermediaries to the customer. This channel is utilized by firms that want to
expand their markets or end users. The result is increase in sales volume and growth in
sales as they relinquish some channels of distribution control and consumer contact.

INTENSITY OF CHANNEL COVERAGE

1. Exclusive distribution is the limited number of middlemen used in a geographic area. It is
also organized in a region or a province to handle the sales and distribution of the
product. They handle the distribution of the product and lessen the expenses.

2. Selective distribution is organizing a moderate number of wholesalers or retailers. The

entrepreneur uses and tries to combine some channel controls and image with good
sales volumes and profits. Chosen dealers are selected based on credibility in the
distribution of the product to the target market.

3. Intensive distribution is organizing many middlemen that are used to obtain widespread
market coverage and channel acceptance. The objective is high sales volume and profit.

4. Dual channels of distribution use a combination of the above to appeal to different

market segments by selling through two or more different channels. The middlemen can
either use exclusive, selective, and intensive to obtain faster service and high profit.

Distribution Management | MARK 30023 5

PHYSICAL DISTRIBUTION
Physical distribution is concerned with the movement of the right amount of the right
products to the right place at the right time (Stanton). This may also be described as a “broad
range of activities primarily concerned with the efficient movement of finished goods from the
end of the production line to the consumer”.
Policy makers must determine whether regional stocks are necessary, and if they are,
whether the seller should establish their own warehouses or use public warehouses; or depend
upon wholesalers to carry regional stocks. If regional warehouses are to be used, locations
must be selected. Policies regarding the use of railroads, trucks, water carriers, and airplanes
must be decided. Does the time involved justify the use of trucks, express, or air cargo?
These are basic questions which must be answered intelligently for slow deliveries may
mean that more money is tied up in goods in transit. Taking this in mind, the risk fashion
depreciation in fashion goods is increased.
The manufacturer must decide whether all goods are to be supplied from one plant or
regional plants established. For highly perishable goods, regional plants may be necessary if a
large part of the country is to be covered. If the costs of production are approximately equal, it
may be more economical to operate several factories than to supply all markets from one plant.

Physical Distribution may involve:

1. Customer service – the ability of the organization to satisfy the customer to its maximum
level.

2. Shipping – the ability to transfer a durable product from one location to the other, which
is a normally far place.

3. Warehousing – the ability to properly store the raw materials, semi-processed goods
used to produce a final product.

4. Inventory control – the ability to provide sufficient supply of raw materials at the right
quantity, time, and quality.

5. Packaging – the ability to make the product presentable before the physical appearance
including its taste, colour, size, weight, and shape.

6. Receiving materials handling – the ability to properly manage the materials for the final
production.

Distribution Management | MARK 30023 6

Five tasks of physical distribution
1. Determine the inventory locations and establish a warehouse system.
2. Establish a material-handling system.
3. Establish and inventory control system.
4. Maintain procedures to process the orders.
5. Select a method of transportation.

Firm’s strategic use of Physical Distribution

The strategic use of logistics may enable a company to strengthen its market position by
providing more customers satisfaction and by reducing the total operating costs. The efficient
management of the physical distribution activities may affect the marketing mix particularly its
product-planning, pricing, and channels of distribution policies. It may result in:
1. Reducing distribution costs – Effectively systematizing these activities may result in a
simplification of functions. Inventories and capital investment may be reduced.

2. Generate additional sales volume – Systematized activities will minimize out-of-stock

conditions, and the result will be more customer satisfaction. A responsive system
can shorten the customer’s order cycle and thus reduce their inventory requirement.

3. Create time and place utilities – These are many conditions under which
management can make profitable use of both transportation and warehousing
facilities in adjusting its rate, time, and place of production to meet the market
demand for the firm’s products. Proper use of warehousing facilities will enable a
producer to store the seasonal surplus so that it can be marketed long after the
production season has ended.

In the economic sense, the function of transportation subsystem in physical distribution

is to add value to products through the creation of place utility.

For example, a manufacturer of sweaters cannot sell their goods unless these goods are
marketed in places of cold weather. That is the only time that they realize value or translate their
goods into cash.

The economic value of storage is the fact that it creates time utility. A product may be
properly located with respect to its market, but the timing may be such that there is no present
market demand. Value is added to the goods simply by holding and properly preserving it in
storage until the demand arises.
For instance, in the production of agricultural products, during the harvest time where
those produces are plentiful, its prices are low. Instead of selling all the produce at a bargain
price, some of them will be stored until such time that the prices will improve.

4. Stabilize prices – If the market is temporarily glutted with a certain product, the seller
can warehouse the product until supply and demand conditions are more favourable.

Distribution Management | MARK 30023 7

 5. Determine choice of channels and locations of middlemen – Logistics facilities may
influence a manufacturer’s decision on where to locate their branches or in what
cities they may seek wholesales. Sometimes a company wants to locate a branch in
a small town, but finds that the additional freight and handling costs from the nearest
transportation centres are prohibitive.

INVENTORY MANAGEMENT
Inventory management’s objective is to provide a continuous flow of goods (tangible)
and to match the quantity of goods kept in proper inventory as closely as possible with sales
demand to meet the required profit in the production and delivery of products both to the
organization and individual clients.

Two Concepts of Inventory Management

Just In Time (JIT)

• This refers to reducing the amount of inventory it keeps on hand by ordering more
frequently and in lower quantity of raw materials, including even the semi-processed
goods. This requires better planning, forecasting, and information on the part of the
purchaser and producer; improve good buyer-seller relationships and better production
of materials; as well as better distribution facilities to the recipient of the product. Another
name for this is the QUICK RESPONSE (QR) INVENTORY SYSTEM which main
objective is to immediately act in accordance with the required units of materials that are
needed in the production of goods.

Electronic Data Interchange

• This refers to computer linkups between suppliers and their manufacturers and
wholesalers to increase sales through its timely monitoring of available stocks needed in
the production, both raw materials and the semi-processed goods. It reduces
markdowns by maintaining sufficient supplies and reducing inventory carrying cost by
helping to speed up the flow of information and merchandise to the organization.

WAREHOUSING AND STORING

Warehousing involves the physical facilities used primarily for the storage of goods and
the maintenance of supply for efficient delivery held in anticipation of sales and transfers within
a distribution channel in the organization.

Distribution Management | MARK 30023 8

Here are some examples of warehouses:
1. Private warehouses – are owned, managed, and operated by firms that store and
distribute their own products. There are no other parties involved. The owners are the
users of the facility so they control the whole operation of the warehouses.

2. Public warehouses – provide storage as well as the safekeeping of the inventory and
related physical services to any interested firm or individual on a rental basis. The said
basis may be daily, weekly, or monthly manner.

3. Bonded warehousing – refer to warehousing where imported or taxable merchandise of

the organization are stored and can be released for sale only after the appropriate taxes
are paid. The items cannot be released without the sufficient payment of the tax payer or
the customer.

WHOLESALING / RETAILING
Wholesaling are activities of persons or organizations that sell to those who buy for
resale (like retailers) or business use (like industrial, institutional, and commercial users). They
lessen the interaction between manufacturers / principals and retailers. For instance, instead of
covering thousands of retailers, manufacturers will just interact with one wholesaler in an area
who will do the selling for them. This makes manufacturers more efficient.

• Suy Sing is synonymous to the word “wholesale” for fast-moving consumer products.
They have a special buying program for the sari-sari stores, which they advertise
periodically. Located in Divisoria, it has big and modern warehousing facilities, which
include computers, industrial elevators, and conveyors.
Divisoria is in Tondo, Manila and is the centre of trade between Metro Manila and the
provinces. There are several wholesalers located in Divisoria and some retailers prefer to buy
from them instead of directly from some manufacturers because of their lenient credit policy.
Wholesalers in Divisoria purchase products on volume basis and mostly enjoy volume
rebate arrangements with manufacturers or distributors. This volume discount becomes the
profit of these wholesalers as they most often sell at the same price as the manufacturers. At
times, the profit of wholesalers comes from buying products on cash basis and selling the same
product on credit with the extra cash discount given by manufacturers as their extra profit.
Wholesalers generally prefer to carry known brands or brands with proven fast sales movement
because of the small margin they make. They may consider new brands depending on how their
principal plans to create demand for these new brands.
Here are the types of wholesaling:

1. Manufacturer Wholesaling – the manufacturer or producer’s control the wholesaling

which performs all the functions such as owning the products which do not receive
payment until a retailer buys them, and deals with a smaller group of customers to
maintain customer patronage.

Distribution Management | MARK 30023 9

 2. Merchant Wholesaling – the wholesaler controls the process of wholesaling such as
buying in bulks of units and performs many functions such as warehousing and inventory
control. They then buy products from the manufacturer and resells to the retailer.

3. Agents and Brokers – the manufacturer owns the products and lets the broker sell the
property, and they pay the agents commission. Payment is made after products are sold.
The broker will get much higher commission to compare to the agent because the latter
does not have any license compared to the broker which has passed a professional
examination intended to them.

Retailing is an activity involving the sale of products or services directly to final

consumers. Examples of store-based retailing are:

• Supermarkets like Unimart and NCC (in Davao)

• Drug stores like Mercury Drug and La Botica
• Bookstores like National, Fully Booked, and Page One
• Department stores like SM and Gaisano (in Visayas and Mindanao)
• Appliance stores like Automatic Center and Ocampo’s (in Pampanga)
• Sports shops like Toby’s, Olympic Village, or Planet Sport
• Music stores like Odyssey, Tower, or Music One
• Hardware stores like Handyman and Cebu Overseas Hardware (in Cebu)
AC Nielsen reported that there are some 256, 851 sari-sari stores, over 2,900 groceries
(with 2-3 checkout counters) and convenience stores, some 766 supermarkets and warehouse
clubs in the Philippines as of 1999. However, while the supermarkets, hypermarkets, and
warehouse clubs are a minority in numbers, they account for over half of the total retail sales.
The Philippines has one of the lowest population densities per convenience stores
(CVS) with only 1 for every 232,000 people as compared to Japan at 1 per 3,000 people.
Taiwan, on the other hand, has a density of 2,000 people per CVS. This shows a big potential in
this store category which is growing faster than other types of retail stores. Even the number of
local 7-Eleven stores pales in comparison with our Asian neighbours. As of the year 2000, the
Philippines has some 150 7-Eleven stores as compared to over 2,555 in Taiwan expanding by
at least 300 stores a year. In short, Taiwan 7-Eleven is expanding at a pace of equivalent to
twice the number of all 7-Eleven stores in the Philippines every year.
In the year 2000, Taiwan 7-Eleven bought the majority stakes of the Philippine franchise
holder and announced plans to increase the number stores in the Philippines by another 500 no
later than 2005. The popularity of CVS will bring about important retailing trends like e-shops, e-
services, ATMs, multimedia kiosks, and fast foods in a single CVS location.
The presence of multinational retailers signals a change in the distribution setup of
products sold through retail stores. For instance:

• Makro charged a listing fee of PhP20,000 per brand per store when they started; they
have since shifted to their international standard of charging a listing fee per item

Distribution Management | MARK 30023 10

 • Some retailers in other countries even impose a failure fee in case a new product
introduced did not do good in the marketplace. This failure fee, of course, is limited to
products without any market research data to show.

• Other retailers have a policy of carrying only the top 3 brands in every category, thus
maximizing revenues per square inch of limited space available.

• Headquarters of multinational retailers are increasingly negotiating for standard world

prices of the same item from multinational manufacturers. This will allow the retailers to
enjoy windfall profit in different locations worldwide due to different price sensitivities. It
will also make the manufacturer’s local arm limited to implementing what their foreign-
based bosses have agreed upon.

Here are the types of retailing:

1. Independent retailer – operates only one outlet because of limited resources such as
manpower, machinery, materials, method, money, and the market itself. It offers
personal services, a convenient location and close customer contact through its
personalized or customised service.

2. Retail chain – involves common ownership of multiple outlets through its dealership, with
centralized systematic purchasing process and efficient decision-making, dispersed
target, or specific markets and well=known company names as well as the organization.

3. Retail franchising – contractual arrangements between a franchisor and a retail

franchisee, which allows a franchisee to conduct a certain form of business or
establishment under an established name and according to a specific set of rules and
regulations.

4. Leased department – a department in a retail store that is rented to an outside party.

The organization can attract other enterprises to maximise the place by providing
enough incentives to the lessee especially if the building is new and unoccupied.

5. Consumer cooperative – a retail firm owned and managed by consumer members who
invest and share profits. The members can decide what products to be sold and what
incentives to be given to the consumer which are the members of the organization such
as cooperatives.

STORE LOCATION
Store location refers to looking for a better place selling a certain product. There are factors
to be considered in looking for a better location. They are as follows:
1. Accessibility to the market
2. Freedom from danger
3. Convenience to the suppliers

Distribution Management | MARK 30023 11

Basic Forms of Store Locations
1. Isolated Store – a retail outlet which is located on a street where there is no adjacent
store that draws customer traffic and captures the interest as well as impact to the
passerby.

2. Unplanned Business District – refers to two or more stores which are located and close
to one another that sometimes produce healthy competition by attracting more
customers.

Kinds of Unplanned Business District

1. Central Business District (CBD) – is the center of retailing in the city nearby other towns
and contains the largest commercial and shopping facilities that attract different market
segments in one locality.

2. Secondary Business District (SBD) – is found at the intersection of two major streets in
the city with a medium-sized department store, a variety store, some specialty stores,
and several similar smaller shops in town.

3. Neighbourhood Business District (NBD) – satisfies the convenience shopping and

service needs of a neighbourhood in the locality by having many small stores or sari-
sarit stores with a major retailer being a supermarket, drugstore, or a variety store. It is
located on the major streets in the area for immediate needs of the customers.

The Three Types of Planned Shopping Centres

1. Regional – sell mostly shopping goods to various, dispersed customers. Normally, it

takes about half an hour to reach a regional centre.

2. Community – have branch department stores, variety stores, large specialty stores, and
several other smaller stores to be included under this centre. They sell convenience
goods and shopping goods or services for community safety and security.

3. Neighbourhood – sell mostly convenience goods and services; these have large
supermarkets, drugstores, and several smaller stores that will cater to the overall needs
of the people in one vicinity.

Distribution Management | MARK 30023 12

DISTRIBUTION STRATEGY
Exhibit 1-1 shows a comparative selling process of a firm targeting end users versus
distribution channels. Different businesses have different selling processes. Some may have a
shorter process but longer intervals between each process. However, it is highly encouraged to
adopt your own selling process based on the situation you are facing.

Exhibit 1-1: Strategic Selling Cycle

A. Selling to End Users B. Selling to Distribution Channels
Prospecting Routine Observation

Pre- Approach Display Check

Approach Warehouse Check

Sales Probing Collection

Presentation Presentation

Handling Objections Handling Objections

Demonstration Sell-out Plan

Closing Closing

For selling to end users (in exhibit 1-1 A)

The selling cycle starts with prospecting (also called target customer). Before
approaching a prospect, preliminary research and preparation, called pre-approach, is done to
ensure a productive sales call. Different ways of approaching customers such as personal visits
or by mail communication may be considered.
To understand and satisfy a customer’s needs and wants, marketers must first identify
those needs and wants by probing or asking questions from the customers. This stage is
likened to a doctor asking his patients questions to determine the type of medication needed to
solve the ailments. Without the sales probing phase, as most “hit-and-run” salespeople would
practice, marketers would be likened to “quick-fix” doctors giving instant medication without

Distribution Management | MARK 30023 13

even asking what and how the patients feel. It is only after probing that marketers should be
able to know whether or not they can satisfy the customer’s needs and wants.
By presenting solutions (through the benefits provided by the marketer’s product)
in response to the identified customer’s requirements, a better trust is created between the
seller and the buyer. Marketers must also know how to handle objections posed by customers,
as some objections are actually signs of procrastination while others are a legitimate concern.
Actual demonstration of a product may be needed before the prospect finally makes up their
mind.

Demonstration is a presentation with the use of an actual product, while a

presentation may only be using sales aids like brochures. Nothing will happen unless a meeting
of the minds is achieved and a sale is consummated and closed. This entails not only
convincing the customer that his needs and wants can be satisfied but also creating the urgency
for the customers to buy soonest. If the product offered and service level is as per customer’s
expectations, then a cycle will continue and a repeat order will be gained.
Without a repeat order, the cycle stops, a sign of lack of customer satisfaction
and loyalty. For consumer durables or industrial products where repeat orders come after a long
period, referral, cross-selling, spare parts orders, would be a substitute indicator of customer
satisfaction; this is to say the business would have to choose which among these are the most
appropriate for the type of business handled.

For firms selling to distribution channels like wholesalers and retailers (in Exhibit 1-1 B)
The selling process is different. The first stage of the distribution selling process is called
routine observation where the marketer tries to observe any situations that would represent an
opportunity to exploit or a threat to counter or preempt. For instance, the presence of new and
massive quantity of merchandising and display materials of a competitor’s brand may signal a
sales promotional campaign that may affect the firm’s volume.
The second stage is to visit the selling area of the retailer to check on their product’s
placement and display. Next, a visit to the warehouse (or through the retail merchandiser) is
done to determine the inventory level of the firm’s products before collection of accounts is
done.
For technology-advanced companies, the preceding 2 steps are done in an automated
way with advanced information provided by the supplier. Through the Electronic Data Interface
(EDI) ordering system called the Efficient Replenishment and Operating System (EROS),
retailers compute stock replenishment based on actual consumer off-take known through the
point-of-sale scanners located in the checkout counter of the supermarkets. This allows the
manufacturers to replenish goods promptly, following the concept of the “just in time” inventory
system.
The volume for delivery is based on a pre-agreed joint forecast quantity between the
manufacturer and the retailer. This eliminates costly overstock or stock-out situation, improves
the order cycle time, and increases in-stock as well as fill rates. In the future, even smaller
companies will be able to afford and use this system, as EDI web browser services are available
through the internet for a small annual fee.

Distribution Management | MARK 30023 14

 Accounts falling on due dates are then automatically deposited to the manufacturer’s
bank account. The system enables the retailer to save on expensive real estate space for
collectors, as well as additional office supplies and manpower to entertain these collectors.
The next few stages would be similar to the selling process to end users except that in
the presentation stage, the marketer would visit the retailer to introduce new products, show
new research outputs, launch new promotions, show new display materials, or introduce a new
member of the team. For new products, a sell-out plan is then agreed to ensure regular reorder.

Distribution Management | MARK 30023 15

Assessment

Answer the following questions concisely.

1. Give examples of middlemen and explain each.

2. What is the role of physical distribution to the marketing process? Why?

3. How does inventory control affect warehousing? Explain and give examples.

4. Why is there a difference in pricing between wholesaling and retailing?

5. Describe the best convenience store that you know.

6. How does store location affect the success or failure of the business?

Distribution Management | MARK 30023 16

Lesson 2 : Emergence of Marketing Channels

The movement of goods or services from the manufacturers to the middlemen to the
ultimate users has been thought of as a channelized flow. From this concept, the phrase
“distribution channels” has been developed. The term “distribution channels” is synonymous to
what is known as the “marketing channels”.

At the end of this lesson, you should be able to:

• Identify the different marketing channels

• Learn how distribution has evolved through the years through the present millennia
• Recognize the different roles of the marketing channels

MARKETING CHANNELS
Marketing intermediaries make up a marketing or distribution channel. A marketing
channel performs the work of moving products from manufacturers to final consumers or
business users. A good marketing channel shortens the time, place, and possession gaps
between the manufacturers and consumers.
A company can sell their products through several channels. Marketing channels like
wholesalers and retailers are sets of interdependent organizations involved in the process of
making products or services available to target customers. Most often, manufacturers and
principals would not want to do the distribution themselves because it entails a different set of
competencies, which may affect profitability and efficiency.
For instance, a manufacturer can make a 15% return on sales but will only make 1 or
2% as a retailer. A wholesaler carrying different complementary but non-conflicting products has
better economies to distribute products than a manufacturer of limited product lines. Different
distribution channels are identified in Exhibit 2-1.

Distribution Management | MARK 30023 17

 Exhibit 2-1: Distribution Channels

Manufacturer

Distributor

Wholesaler Jobbers

Retailers

End Users

EVOLUTION OF DISTRIBUTION
Marketing channels always emerge out of a demand that marketplace needs to be better
served. However, markets and their needs never stop changing; therefore, marketing channels
operate in a state of continuous change and must constantly adapt to confront those changes.
From its inception to its contemporary standing, the evolution of marketing channels thought can
be divided into four groups.
There have been major stages in the history of marketing, which are the following:

• The Trade Era: Production consisted in handmade goods that were limited and
generally traded through exploration

• The Production Orientation Era: Enter the industrial age. Since gods were scarce,
businesses focused mainly in manufacturing. As long as someone was producing,
someone else would want to buy it. This orientation rose to popularity due to shortages
in the market, hence creating the foundation of Jean-Baptiste Say’s famous remark:
“Supply creates its own demand.”

• The Sales Orientation Era: After the Industrial Revolution, competition grew and
focused turned to selling. Marketing, branding, and sales became important pillars as
outputs surpassed demand, and companies competed for customers.

• The Marketing Orientation Era: From the second half of the 20th century onward, the
saturation of markets led companies to bestow upon marketers the opportunity to
perform on a more strategic level. Through profound knowledge on the customer, these

Distribution Management | MARK 30023 18

 professionals were involved in what the company would produce, as well as decisions
on its distribution channels and pricing strategy. Employees within an organization where
also motivated to acquire marketing knowledge, which set the grounds to clients
obtaining a general brand experience.

• The Relationship Marketing Era: The focus of companies shifts toward building
customer loyalty and developing relationships with clients. Authors such as Don
Peppers, Martha Rogers, and Philip Kotler were instigators of the importance of creating
bonds, considering that “the cost of attracting a new customer is estimated to be five
times the cost of keeping a current customer happy.” (Kotler, 1997)

• The Social/Marketing Era: It concentrates on the social interaction and a real-time

connection with the clients. Businesses are connected to current and potential
customers 24/7 and engagement is a critical success factor. Consider how much
marketing has changed in the last century and will continue to shift as channels of
communication, production levels, and society alter. As markets expand and new
marketing platforms emerge, the science and practice of this profession is being
transformed by the minute. What we consider today to be the fastest way to reach our
customers might be obsolete tomorrow. Therein lies the beauty of this profession –
change. (Bartles, Robert. 1951. The Journal of Marketing Vol. XVI 2. Structure and
Functions (Framework))

The functions performed by channel intermediaries remain essentially the same.

Intermediaries have always helped channels to ‘CRAM’ it: create utility by contributing to the
Contactual efficiency, facilitating Routinization, simplifying Assortment, and Minimizing
uncertainty within marketing channels.

ROLES OF MARKETING CHANNELS

1. “To provide an effective link between production and the target consumer in today’s
environment, the main question is who will perform this task and will it be executed given
the new tools of technology and management?”

Source: Go, Josiah and Escareal-Go Chiqui (2010), Fundamentals of Marketing, Josiah and Carolina Go
Foundation, Inc., p.321

2. “Marketing Channel decisions are among the most important factors facing marketing
managers. A company’s channel decisions directly affect every other marketing
decisions. Companies often pay too little attention to their distribution channels.
Distribution channel decisions often involve long-term commitments to other firms.”

Source: Maria Victoria M. AC-AC (2009), Principles of Marketing, Anvil Publishing Inc. Page 203

3. “Marketing channel selection largely depended on two criteria. One consideration is the
circumstances existing in the market and the second is dependent on consumer needs.
Furthermore, distribution channels may vary overtime. For example, the channel for

Distribution Management | MARK 30023 19

distributing beer has been redirected from clubs and entertainment houses to
supermarket and groceries. Hence, there is a need for marketers and their modes of
distribution to be consistently aware of consumer needs. This will help them keep their
distribution methods updated.”

Source: Young, Felina C. And Pagoso, Cristobal M. (2011), Principles of Marketing, REX Book Store, Page
213

Distribution Management | MARK 30023 20

Assessment

Answer the following questions concisely.

1. Give one role of the marketing channel and explain its relevance.

2. Marketing is ever-evolving, and is distribution. Give one era besides our own and explain
why it will not be applicable in this day and age.

3. Do you think it is possible to eliminate middlemen in the distribution channel? Why or

why not?

Distribution Management | MARK 30023 21

Lesson 3 : Components of Marketing Channels

In this lesson, we will discuss the different components of marketing channels that affect
our distribution.

At the end of this lesson, you should be able to:

• Understand the nature and functions of distribution channels

• Learn about the different types of middlemen present in distribution channels
• Learn about the elements of physical distribution and legal selling

NATURE OF DISTRIBUTION CHANNELS

A distribution channel is a set of various interdependent organizations involved in the
process of developing a product or service allotted for use or consumption by the consumer or
business user.

Marketing Intermediaries Used

The use of intermediaries or middlemen results from their greater efficiency in making
goods available to meet its target markets. The following factors such as contracts, experience,
specialization scale of operation, and intermediaries help the firm achieve its objectives. The
role of marketing intermediaries is to innovate the variations of products produced by
manufacturers into the desired final products by consumers. Intermediaries play an important
role in matching supply and demand by also determining the needs and wants of the
consumers. The manufacturers produce limited choices, but consumers want complex
variations of products. Intermediaries purchase large quantities of various manufacturers and
separate them into the limited quantities preferred by consumers.
Distribution Channels are simply groupings of weak and independently-owned and
managed companies. Light attention was given to the overall performance of these distribution
channels. The conventional organization was traditional and passive. It lacked strong
leadership, troubled by conflicts, and characterized by poor performance. Hence, the vertical
marketing system, one of the biggest distribution channels, was developed. The vertical
marketing system was designed to challenge the conventional distribution channel organization.
It improved performance and efficiency, provided opportunities for stronger leadership, and
maximum customer relationships.
1. Corporate Channel: Some corporations develop their own vertical marketing
systems. They do this by undergoing internal expansion and/or buying other firms. In
a corporate vertical system, a firm at one channel level owns the firms at the next
level or owns the entire channel. Middlemen can engage in this vertical integration
structure.

2. Administrative VMS (Vertical Marketing System): In administered channel system,

the channel members informally agree to cooperate with each other. They can
standardize accounting activities, and coordinate promotion efforts. And
administered VMS coordinates distribution activities through the market and/or
economic power of one channel member or through the shared power of two channel
members. Typically, brand and market position are effective enough to gain the

Distribution Management | MARK 30023 22

 voluntary cooperation of the retailers in the aspect of inventory levels, advertising,
and store displays.

3. Contractual VMS: In a contractual channel system, the channel members agree by

contract to cooperate with each other. In this system, the members achieve some of
the advantages of corporate integration while retaining some of the flexibility of a
traditional channel system. In a contractual VMS, independent firms, producers,
wholesalers, and retailers operate under contracts that specify how they will
endeavor to improve distribution efficiency and effectiveness.
st
Source: (p. 217-219 Principles of Marketing 1 Edition by Young, F.C., Pagoso, C.M., 2008)

A recent innovation in marketing channels is the use of strategic channel alliances,

whereby one firm’s marketing channel is used to sell another firm’s products. Strategic alliances
are popular in global marketing, where the creation of the marketing channel relationships is
expensive and time-consuming.
Corporate Systems: The combinations of successive stages of production and
distribution under a single ownership is corporate vertical marketing system (VMS). For
example, a producer might own the intermediary at the next level down in the channel, this
practice is called forward integration.
Vertical Marketing System: The traditional marketing channels described so far
represent a loosely-knit network of independent procedures and intermediaries brought together
to distribute goods and services. However, new channel arrangements have emerged for the
purpose of increasing control in performing channel functions and achieving greater marketing
efficiency and effectiveness.
Contractual System: Under a contractual vertical system, independent production and
distribution firms integrate their efforts on a contractual basis to obtain greater functional
economics and marketing impact that they could achieve alone.
nd
Source: (p. 431-432 Marketing in Asia 2 Edition by Kerin, R.A., Lau G. T. Hartley, S.W. & Rudelius, W. 2013)

Vertical Marketing System and International Strategic Alliances

• A vertical marketing system distribution arrangement involves the procedure, wholesaler,

and retail performing marketing activities, as a unified system. These systems are
planned to the extent to which functions are integrated throughout the system. Often
vertical marketing systems include partial ownership between the cooperating
companies.

Gray market

• The practice of distributing products through distribution channels that are not authorized
by the marketer of the product. In international marketing, the process is often referred to
as parallel importing or the use of gray market tactics across international borders.
Source: (p. 387. International Marketing by Baack, D.W., Harris, E.G., Baack, D. 2013)

Distribution Management | MARK 30023 23

Corporate・ Contractual・ Conventional

Corporate system is being used by organizational units during phases of creation and
development. In this case, the producer is the owner of the channel system, which relies on him.
It is a vertically-oriented system in which the producer is obliged to provide financial and human
capital.
Contract system is quite a new concept in Poland. Its most popular form is called
franchise, which is one of the fastest growing sectors of distribution.
Conventional system is based on the foundation of working with independent
intermediaries (wholesalers, retailers, agents, etc.)
Source: (p. 144-145 Distribution Channels and their Roles in the Enterprise Vol. 6. Polish Journal of Management
Studies by Szopa P., Pekala W., 2012)

FUNCTIONS OF DISTRIBUTION CHANNELS

1. Selling and Promoting – In selling and promoting, the sales force of the wholesalers help
manufacturers reach many small customers at a low cost. Wholesalers have more
contacts and are often trusted by the buyers.

2. Buying and Assortment building – in buying and assortment building, wholesalers can
select items and build assortments needed by their customers. This saves consumers
much work.

3. Bulk-breaking – in bulk=breaking, wholesalers break large lots into smaller quantities.

Sales of smaller volume are easily realized.

4. Warehousing – In warehousing, wholesalers hold inventories and sell at lower selling

prices.

5. Transportation – in transportation, there is a quick delivery to buyers because they are

closer than producers.

6. Financing – in Financing, wholesalers finance their customer by giving credit, and they
finance their supplier by ordering early and paying bills on time.

7. Risk bearing – in risk bearing, wholesalers absorb the risk by taking the title and bearing
the cost of theft, spoilage, and obsolescence.

8. Management information – in management information, wholesalers give information to

suppliers and customers about competitors, new products and price developments.

9. Management service and advice – in management service and advice, wholesalers help
retailers train their sales clerks, improve store layouts and displays, and set up
accounting and inventory control systems.

Distribution Management | MARK 30023 24

TYPES OF MIDDLEMEN

The merchant and the agent are the two general types of middlemen.

Merchant

The merchant is a middleman who buys and sells good in an attempt to make a profit.
He owns the goods (has title) and takes the risks involved in ownership, but does not always
have the goods in his possession. Under this type of middleman are the wholesaler, the retailer,
the assembler, and the jobber.
The assemblers are the wholesalers who deal mainly in farm products, although some of
them handle fish and seafood. As their name implies, basically their function is to assemble
farm products at local producing points or in the cities of producing regions. By purchasing from
a number of smaller farmers or fishermen, or other local dealers, they assemble sufficient
quantities for economical handling and shipping. In contrast, many who9lesale establishments
buy in large quantities which they break up into smaller lots to meet the needs of their
customers. Briefly put, assemblers are engaged in the concentration of the products while most
wholesalers are engaged in the dispersion of merchandise.
The jobbers are wholesalers who also provide warehousing space for manufacturers
and distributors, thus enabling the latter to avoid a fixed cost. Jobbers are usually appointed in
areas where a firm does not have economies of scale. Jobbers enjoy a discount depending on
the amount they purchase.

For instance, a canned goods manufacturer based in Manila may appoint a jobber in
Baguio City. The jobber may have a combined wholesaling and grocery retailing operation. The
booking salesman assigned to the jobber will get the jobber’s order plus conformity to accept
additional volume needed by the manufacturer. Assurance is given that the additional volume
will be purchased back by the manufacturer with the jobber’s discount as his extra profit. The
manufacturer’s ex-truck salesman will handle the buy-back operation by buying stocks from the
jobber on cash basis at the same gross price sold to the jobber. The ex-truck salesman then
saturates nearby areas and will replenish his tocks by buying again on cash basis from the
jobber.
The manufacturer will not only save warehousing cost such as space rental, manpower,
light and water, and many other incidental expenses; they will also have control over the
accountability of their ex-truck salesman who is given a limited amount of stocks to avoid the
temptation of spending company’s assets. The jobber on the other hand, enjoys a special
relation with the manufacturer, aside from additional profit from the jobber’s discount.

Agent
The second type of middleman is the agent or functional middleman. They are an
individual or agency which performs marketing functions without having title to the goods. They
operate on an agency basis and perform the functions for pay. Examples are the broker,
commission merchant, selling agent, buying agent, and the manufacturer agent.

A broker is an agent who specializes in selling or buying for their principal without
actually having the possession or title to the goods, and who receives their compensation in the
form of a commission – a percentage of the value of goods sold. A broker’s job is to make

Distribution Management | MARK 30023 25

contracts for the purchase or sale of property, or to bring buyer and seller together. The broker
is an independent businessman, not an employee of his principal.
A commission merchant is an agent who receives goods on consignment for sale on a
commission basis; that is, they receive goods of others for sale, has physical control but has no
title to them, and accounts to the owner for the proceeds of the sale.
A selling agent is an independent business enterprise which operates on a commission
basis and whose principal function is to sell the entire output of a given line for one or more
manufacturers with who he has continuous relationship.
A buying agent makes purchases and supplies the manufacturer with market
information. A buying agent may only negotiate contracts, or he may inspect, receive, store, and
ship the goods. They may be paid on commission or on monthly basis.
Manufacturer agents are functional middlemen who sell part of the output of a certain
manufacturer on an extended contract basis. They are limited with respect to territory, prices,
and terms of sale.

ELEMENTS OF PHYSICAL DISTRIBUTION

1. Order processing – responsible for the timely, accurate, and efficient processing of
customer orders into the firm.

2. Warehousing – satisfy the discrepancies that arise between inventory availability and
the time and place requirements of the marketplace.

3. Finished goods management – control of finished goods inventories which covers a

wide spectrum of activities ranging from managing stocking level and order picking.

4. Materials handling and packing – consists of a number of activities such as

containerization, vehicle-loading, hazardous product-handling, and packaging.

5. Shipping – management of incoming orders and the latter outgoing orders; receiving
and shipping have similarities.

6. Transportation – one of the costliest parts of the business, sometimes accounting for
over 50 percent or more of the cost of goods.

Source: (p. 88-89 Distribution Planning and Control: Managing in the Era of Supply Chain Management by Ross, D.
2004)

Distribution Management | MARK 30023 26

Some other elements are:
1. Inventory control – in the entire physical distribution management, size, location,
handling, and transporting of inventories assume a very important role – the aims at
securing minimum capital investment and fluctuations in inventories as well as prompt
order execution as per customer demand.

2. Storage – the process of holding and preserving goods.

3. Material handling – experiences the greatest change and improvement in efficiency

due to mechanization.

MEGA SELLING
It is selling of millions of units to the buyers by offering huge incentives. Normally, sellers
used sales promotion to attract or encourage more sales to increase income.

Types of Mega Selling

1. Exposition – Expo, or Exposition, is somewhere in the middle between a trade show or
exhibition. Expo is open to the public, but focuses on business networking, especially
export opportunities. Expositions are very large-scale events, usually international
covering many industries; they have government support and a lot of government
organisations as exhibitors.

2. Exhibition – Exhibition is an event to collectively display different art, products, or skills.

Both individuals and businesses partake in this event to reach specific goals. Various
types of exhibitions are especially organized to cater to the needs of the participants.

The 2 Types of Exhibition

1. Commercial

a. Art exhibitions – these can include paintings, figurines, drawings, and photos. They
can be commercial and non-commercial. Non-commercial art galleries show art
pieces of renowned artists and are available to the public. Commercial art exhibitions
on the other hand, are held to showcase the artworks of debutant artists. Their
purpose is to have their works examined by art enthusiasts. They can end up selling
their pieces once it gets attention and recognition.

b. Trade shows – are events between organizations and businesses. They are
designed to let the participants showcase their products and services and see if
those can gain the interest of another company. They are commercial exhibition, but
only those invited can attend.

Distribution Management | MARK 30023 27

c. Consumer exhibition – are taken advantage by different companies to expose their
products and services to the public. The theme can be intended for a particular
demographic (e.g., mothers, teenagers) or assembled to show a particular product or
service (e.g., IT shows, car shows). The idea behind this event is to attract the public
to buy their products or services.

Distribution Management | MARK 30023 28

Assessment

Answer the following questions concisely.

1. Why is it necessary to reach the target market?

2. Explain mega selling.

3. How do retailers help the manufacturers? Explain and give examples.

4. Describe the vertical marketing system.

5. How are the agent and the broker considered independent from each other?

6. What is the use of marketing intermediaries? Explain and give at least one example.

Distribution Management | MARK 30023 29

Lesson 4 : Channel Management

Marketing channel managers must create an environment in which sales can take place
at a profit. The marketing planning process presented here shows how to plan for the creation of
such a market.

At the end of this lesson, you should be able to:

• Understand the planning, coordinating, organizing, and controlling of channels in the

marketing environment
• Realize the channel conflicts that may arise in the marketing and channel environments

CHANNEL PLANNING
Based on McCalley, there are seven steps in the marketing channel planning process. Each
step is listed below with a brief explanation of the action involved. These steps provide an
overview of the process and sequential progression that must be followed in order to produce a
plan with integrity.

The Seven Steps of the Channel Planning Process

1. Planning Premise or Mission Statement: Establish the direction of the planning
activity

2. Situation Analysis: Verify the planning premise and develop an analysis of facts.

3. Opportunities and Obstacle: Identify specific, viable opportunities and obstacle plans

4. Goals and Objectives: Determine acceptable goals and set specific objectives as steps
in their accomplishment

5. Determination of Strategies: Plan of actions and activities calculated to result in

reaching specific goals

6. Action Plans and Responsibilities: Produce or obtain action plan assignments,

requirements, authorization, schedule, measurements, controls, responsibilities, and
support

7. The Profit Plan: Document the financial expectations based on reaching the plan
objectives and goals, and provide the marketing budget requirements

Distribution Management | MARK 30023 30

CHANNEL COORDINATING
Nesline, Scott A. and Winer, Russel S. wrote a book that said channel management
ultimately is all about managing profits. Since the individual channel members are independent
businesses, it seems natural to assume that each member’s goal is to maximize their own profit,
as found in many studies. However, there are channel systems where the manufacturer
integrates forward or the retailer integrates backward.
In this case, the objective is to maximize total channel profits since the organization gets
profits from both levels. This objective is also found in the channel coordination literature. In this
case, the problem is to devise some way of getting independent agents within a channel system
to choose that set of actions that leads to the equilibrium solution associated with maximizing
total channel profits.
In effect, channel coordination and vertical integration both address the issue of
overcoming the negative profit impact of double marginalization, i.e., the effects of each
independent decision maker selecting the action that maximizes its own profits. The difference
is that vertical integration solves the problem via organizational structure, while channel
coordination solves the problem through some incentive scheme.
Source: (Pages 275 – 276 History of Marketing Science by Neslin, S. A. and Winer, R. S. 2014)

Channel coordination (or supply chain coordination) aims at improving supply chain
performance by aligning the plans and the objectives of individual enterprises. It usually focuses
on inventory management and ordering decisions in distributed inter-company settings. Channel
coordination models may involve mutli-echelon* inventory theory, multiple decision makers,
asymmetric information, as well as recent paradigms of manufacturing, such as mass
customization, short product life cycles, outsourcing, and delayed differentiation. The theoretical
foundations of the coordination are based chiefly on the contract theory.
Source: (p.299 The Theory of Industrial Organization by Choi, T. 2011)

CHANNEL ORGANIZING
The work of planning and organizing a system of marketing channel involves at least
three essential steps:
1. Identify the various jobs and sub-jobs that must be done in order to sell the product and
move them smoothly to markets. It is also necessary to identify the factors that influence
the manner in which these jobs must be done.

2. Decide the types of agents or marketing units that are expected to carry out the jobs
most effectively.

3. Select and establish relationship with the individual units most suitable.
Comparatively, few marketing managers never face the job of setting up a distribution
channel system from scratch. A far more useful task is that of making adjustments in the

Distribution Management | MARK 30023 31

existing channel system to meet the changing conditions or objectives. The three steps stated
above must be carried out cautiously or informally in either case, if the whole job is to be done
well.
The job of modifying an existing channel is probably the more difficult of the two. Even in
the initial planning and analysis stage of rebuilding operation, the marketing manager is likely to
find his thinking obscured by a tendency to assume that the familiar is right. Once he visualizes
the system he desires, he finds that in system so violently that his firm serious loss of volume,
market position, and profits. Remedial action for an outlet may seem to threaten the position of
a good one that may seek new connection or lose some enthusiasm for the present one. In
such circumstances, the marketing manager must erect his new structure one piece at a time
over a considerable period.

CHANNEL CONTROLLING
Some of the factors that influence the choice and organization of channels are as
follows:
a. Is the market horizontal or vertical?
b. Is the possible volume of sales large or small in the average market area?
c. To what extent are the possible purchasers concentrated geographically?
d. What are the buying habits of the users?
e. What is the gross profit margin?
f. Must the product be installed?
g. How much technical service does the product require?
h. How important is quality?
i. How bulky is the item?
j. What kind of repair and maintenance service does the user need and by how much?
k. What is the firm’s size and financial position?
l. What are the seller’s marketing objectives?
m. What is the amount of market feedback needed and the degree of information accuracy?

CHANNEL CONFLICT
Much of the discussion throughout this text is based on an underlying assumption of
trust, commitment and cooperation among channel members, with an emphasis on building
viable relationships to achieve distribution objectives. Indeed, channel strategy and
management could not possibly be implemented effectively unless channel members trust each
other, are able and willing to make a commitment to the channel relationship in terms of human
and capital resources, and are willing to cooperate with each other. But given that the marketing
channel is a social system, there is no escaping the fundamental behavioural dimension
inherent in all social systems – conflict. While there are many definitions of “conflict”, in the
context of marketing channel, conflict exists when a member of the marketing channel perceives
that another member’s actions impede the attainment of their goals. As Stern and Gorman
state,

Distribution Management | MARK 30023 32

 In any social system, when a component perceives the behaviour of another
component to be impeding the attainment of its goals or the effective
performance of its instrumental behaviour patterns, and atmosphere of
frustration prevails. A state of conflict may, therefore, exist when two or more
components of any given system of action, e.g., a channel of distribution,
become objects of each other’s frustration.

As an example of the emergence of conflict in the marketing channels, consider the

marketing hcannels for automobiles. The Big Three domestic auto manufacturers – GM, Ford,
and Chrysler – are linked with independent dealers of U.S. automobiles. All three manufacturers
record revenues and profits upon delivery of cars to the dealers. Hence, large inventories on
dealer lots show up as favourable to revenue, and profit results for manufacturers, so they
relentlessly push dealers to order cars.
But from the dealer’s perspective, these large inventories are highly burdensome to
finance when retail sales slowdown. Such discrepancies between what is good for the
manufacturers and what is good for the dealers have led to substantial conflict between the
parties. The auto dealers perceive the manufacturer’s behaviour to be impeding their
opportunity to control expenses, while the manufacturer’s view the dealer’s resistance in
carrying more cars as inhibiting their quest for sales and profit growth. Thus, manufacturers and
auto dealers can become objects of each other’s frustrations, especially during periods of slow
retail auto sales.
Source: (p. 696 Marketing Channels 8th Edition by Bert Rosenbloom 2012 Engage Learning
ISBN 0324316984, 9780324316988)

Causes of Channel Conflict

1. Role Incongruities

Role: a set of prescriptions defining what the behaviour of position members (i.e.
channel member) should be. Example: Franchisees are expected to operate in
strict accordance with the franchisor’s standard operating procedures. If the
franchisee deviates from the given role by deciding to institute some of their
policies, a conflict situation may result.

2. Resource Scarcities
Sometimes conflict stems from a disagreement between channel members over
the allocation of resources needed to achieve their respective goals.

Example: The retailers are viewed by both the manufacturer and the wholesaler
as valuable resources necessary to achieve their distribution objectives.
Frequently, the manufacturer will decide to keep some of the higher volume
retailers as house accounts (stores that the manufacturer will sell directly to).
This leads to objections by the wholesaler over what is considered to be
unfavourable allocation of this resource (the retailer).

Distribution Management | MARK 30023 33

3. Perceptual differences

Perception: the way an individual selects and interprets environmental stimuli.

The way such stimuli are perceived however, is often quite different from the
objective reality.

Example: The use of point-of-purchase (POP) displays the manufacturer who

provides these usually perceives POP as a valuable promotional tool needed to
move products off a retailer’s shelves. The retailer, on the other hand, perceives
POP material as useless junk that serves only to take up valuable floor space.

4. Exceptional Differences

Various channel members have expectations about the behaviour of other

channel members which sometimes in reality, they are not behaving like how
they are expected to.

Example: Aamco is the United State’s largest transmission repair business.

Extended warranties offered by auto manufacturers were expected to
significantly reduce business for AAmco’s franchisees. This led many franchisees
to push for a reduction of franchise royalty fees from 9% to 5% while the parent
Aamco argued that it needed the higher rates to advertise/promote more
aggressively.

5. Decision Domain Disagreements

Example: Many manufacturers feel that pricing decisions are in their decision-
making domain. The manufacturer makes it known to the retailer that if they do
not abide by the manufacturer’s pricing “recommendations”, the retailer will lose
the product line. Retailers who need price flexibility in highly-competitive markets
often feel that by attempting to dictate pricing, the manufacturer is encroaching
on the trailer’s domain.

6. Goal Incompatibilities Between Channel Members

Example: Amazon.com. The goal of the publishers and manufacturers of new

books, CDs, DVDs, and consumer electronics products that sell their products
through Amazon is to sell as much of their products as possible through it.
Amazon’s goal on the other hand, is to sell as much merchandise as possible
from whatever sources provide the most revenue and profits which include used
merchandise.

7. Communication Difficulties

Example: Alpha Graphics, a franchiser of printing services faced communication

difficulties when the franchisees felt a lack of adequate support from franchisor.

Distribution Management | MARK 30023 34

 Franchisees would be sent their royalty program payments to the franchisor and then
receive no information about how their money was being spent to help improve their
businesses.

Classification of Channel Conflict

Vertical Conflict

A Vertical Channel is a combination of two or more stages of the channel under one
management. The act of this is also called as the Vertical Channel Integration. This is made
possible by purchasing the operations of a link in the channel or by performing the functions of
the said link at some other stage, thereby eliminating the need for an intermediary ot perform
the functions. Total vertical integration would include control of all functions from production to
final buyer. Oil companies do this. They own oil wells, the transportation, facilities, refineries,
and perhaps even the service stations that the consumers patronize.
Vertical conflicts occur when there is a disagreement or miscommunication between two
channel members continuously. This also happens when there is a difference in vision/mission
and misunderstandings. This is commonly because of poor communication. The main reason is
the lack of clarity in role and dependence solely on the manufacturers.
Source: (https://businessjargons.com/channel-conflict-management.html)

Horizontal Conflicts
A horizontal channel is a combination of institutions at the same level of operation under
one management. This constitutes what is called the horizontal channel integration. Department
stores such as Wards illustrate horizontal integration at the retail level. Because many retail
stores are operated by one management, Wards can develop the marketing mix of all stores.
Shell Oil owns refineries throughout the world, and these result in horizontal integration at the
producer level. Efficiencies and economies of scale in advertising, marketing research,
purchasing, and employing specialists are made possible through horizontal integration. An
organization can do horizontal integration by merging with other organizations or by expanding
the number of units at one channel level. Horizontal integration is not always the best
managerial approach to improving distribution. Its limitation includes difficulties in coordinating
an expanded number.
Horizontal conflict refers to a miscommunication among two or more channel members.
These are conflicts between channel members at the same level, example are two or more
retailers, two or more franchisees, etc. Some of the conflicts can offer favourable benefits to the
buyers. Competition that can cause price wars between two dealers or retailers can provide
benefits to the consumers.
Source: (https://businessjargons.com/channel-conflict-management.html)

Distribution Management | MARK 30023 35

Inter-type Conflicts
Inter type conflict occurs when the intermediaries dealing in a particular product start
trading outside their normal product range. Large retailers offen offer a large variety and thus
they compete with small but specialized retailers. This concept is called “Scrambled
merchandising” where the retailers keep the merchandise lines that are outside their normal
product range.
Source: (https://www.slideshare.net/gitikajagwani/channel-conflicts)

Multi-Channel Conflicts

Multi-Channel conflict happens when the producers use the dual distribution strategy
wherein the manufacturer uses two or more channel arrangements to reach the same market. It
can sell directly through their exclusive showroom or dealer. This act can affect the business of
other channels selling the manufacturer’s brand. The conflict can intensify more in this case as
the large retailers can enjoy more consumers.
Multi-Channel conflicts refer to disagreements among members in separate marketing
channels. While neither strictly horizontal nor vertical, these conflicts can affect all members of
every channel. For example, the food manufacturer participates in two marketing channels. In
the first channel, the manufacturer sells its products directly to consumers via their social media.
In the second channel, the manufacturer sells their products to wholesalers for resale to
retailers. If the food manufacturers online sell the product for much lower prices than retail
stores, there will be sales in the second channel. The resulting conflict will expect some solution
that works for the first and second channels.

Source: (https://businessjargons.com/channel-conflict-management.html)

Distribution Management | MARK 30023 36

Managing Channel Conflicts
1. Determining channel conflict – gathering information of other channel members’ ideas
and information of their performance to identify areas of conflict or its potential before it
develops. The marketing channel audit or distributors’ advisory councils/channel
members’ committees can also be considered as an approach to determine channel
conflict.

2. Evaluating the effect of conflict – adopting methods to measure conflict and its
impacts on channel efficiency. To measure conflict and evaluate its effects on channel
efficiency will still be made at a conceptual level that relies on the president’s subjective
judgment.

3. Solving conflict – channel-wide committees might be established for periodic

appraisals of emerging problems related to conflict. Combined setting of goal by the
committee will consider the goals and special capacities of the various channel
members, the need for consumers, and environmental constraints.

Distribution Management | MARK 30023 37

Assessment

Answer the following questions concisely.

1. Why is it necessary to consider the steps in channel planning process?

2. What are the classifications of channel conflict?

3. How do the three essential steps in channel organizing help in the attainment of
organizational goals and objectives? Explain and give at least one examples.

4. Discuss channel conflict. Why is it relevant to learn about this in particular?

5. Explain how channel conflict helps the organization solve their problems. Cite at least
one example.

Distribution Management | MARK 30023 38

Lesson 5 : Marketing Channel

The Marketing Channels are visibly important as established in the previous lessons.
Here we will have a glimpse of its concept, participants, as well as its environment. This lesson
emphasizes on its importance and its purpose in the marketing landscape.

At the end of this lesson, you should be able to:

• Understand the concept of marketing channels and recognize the participants within
them
• Learn about the environment and behavioural processes of marketing channels
• Come up with strategies of marketing channels

MARKETING CHANNEL CONCEPT

Marketing channels are defined as the internal or external organization that
management operates to accomplish its distribution goals and objectives. It is a set of
interdependent organisations involved in the process of developing goods or services intended
for use or consumption.
Role of producer and end-user in the marketing channel:
1. The manufacturer is the creator of the product or service and can also be the originator
of the service. For example, if one leg of the distribution network is the company sales or
service network, the manufacturer is also providing the customer service output. In the
case of financial institution like banks and insurance companies, the product and service
roles of the producer are performed by them giving the impression that they are also a
channel member.

2. The consumers may buy these larger quantities at a time for various reason such as: (a)
the manufacturer is offering a bargain on the product which normally is not available,
and (b) the product or commodity is available at the best price as it is a seasonal product
(like food grains, edible oil, or spices for example).

3. Manufacturers or end-isers cannot be considered as part of the marketing channel. It is

appropriate to only call the intermediaries as the marketing distribution channel
members, and it is highly encouraged to understand their role properly.

MARKETING CHANNEL PARTICIPANTS

Channel participants are defined as the participants that engage in negotiator functions linked
together by the flows of negotiation or ownership.
The three basic distinctions of the marketing channel are: producers/manufacturers,
intermediaries and consumers. Producers, manufacturers, and intermediaries are further broken
down into wholesale, retail, intermediaries, and industrial users. Final users are defined as
target markets or consumers.

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Producers and Manufacturers
Producers and manufacturers consist of firms or enterprise that are involved in
conceptualizing, developing, or making of products. For the needs of the consumers to be
satisfied, products must be made available to the consumers when, where, and how they need
these said products.

Intermediaries
Intermediaries are independent businesses that help producers and manufacturers in
the performance of negotiation and other distribution tasks.

Wholesalers
They consist of businesses that are involved in selling goods for resale or business use
to retail, industrial, commercial, institutional, professional, or agricultural firms, even to other
wholesalers.

Types and Kinds of Wholesalers

The three major types of wholesalers as defined by the Census of Wholesale Trade are:
1. Merchant Wholesalers – are firms engaged primarily in buying, taking title to, usually
storing, and physically handling products in relatively large quantities and then reselling
the products ins smaller quantities to others. They have different names such as:
wholesaler, jobber, distributor, industrial distributor, supply house, assembler, importer,
exporter, and supplier.

2. Agents, brokers, and commission merchants are independent middlemen who to not
take title to the goods in which they deal, but who are actively engaged in the buying and
selling functions on behalf of others. They are usually compensated in the form of
commissions on sales or purchases. They also go under other names such as selling
agents, import and export agents.

3. Manufacturer’s sales branches and outlets are owned and operated by manufacturers
but are physically separated from the factories.

Distribution tasks performed by merchant wholesalers perform the following types of

distribution tasks for producers and manufacturers:
1. Market coverage is performed because the market for products consists of many
customers spread across large geographical areas.

2. Making sales contact is a valuable service provided because the cost of maintaining an
outside sales force for many firms is prohibitively high.

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 3. “Holding” inventory is when the wholesaler takes title to and possession of the producer
and manufacturer’s products.

4. Processing orders is very helpful to producers and manufacturers because many

customers purchase in small quantities.

5. Gathering market information: Wholesalers are close to their customers through frequent
sales contacts. As such, they are in a good position to learn about a customer’s product
or the requirements of a service. Such information then can aid producers and
manufacturers in their product planning, pricing, and the development of new products.

6. Customer support is the final distribution task performed for producers and
manufacturers on their behalf. Products may need to be assembled, set up, or they may
require technical assistance. This allows the wholesaler to provide “value-added
services” to the customer thus increasing the competitive advantage of one wholesaler
over to another. This extra support plays a crucial role in making wholesalers vital
members of the marketing channel from the standpoint of both the producers and
manufacturers and the customers they serve.

In addition to the above-mentioned services, merchant wholesalers are equally well-suited

to perform the following distribution tasks for their customers:

1. Ensuring product availability: Ensuring that both the quantity and the variety demanded
by the customer is available to them when needed.

2. Providing customer service: Services such as delivery, repairs, or warranty, after sales
service through follow-ups and consultation.

3. Extending credit and financial support: Wholesalers provide this service in two ways.
First by helping the customers to “open” accounts on the products they bought, and
second by storing the needed inventory especially the fast-moving products of the
customers. It eliminates the financial and space usage for the customer.

4. Assortment convenience: By bringing together a variety of products from hundreds of

manufacturers, the customer need only place one order for many products.

5. Breaking bulk: Shipping costs greatly influence the shipment of many products by rail or
truckload quantities.

6. Accommodating customers with advice and technical support: This refers to the value-
added after sales services though follow-ups and getting feedbacks.

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THE ENVIRONMENT OF MARKETING CHANNELS
According to Havaldar (2012), marketing channels make exchanges possible between
someone who has something to offer to someone else who is in need – exchange of products,
services, or even information. The use of the word “marketing channel” seems to have started
describing the trade “intermediaries” who have connected companies and the users of their
products.
These “exchange relationships” have evolved with the matureity of markets and the
development of technology. To quote marketing experts – marketing channels are enduring but
flexible systems. For example, the relationships in the network today with the use of the internet
are far different from all the routine relationships in a network from a company; its carrying and
forwarding agent (C&FA), distributor, a wholesaler, and retailer.
A summary of some of the milestones in the evolution of marketing channels are given
as follows:
In the past, all the products were those which were produced on the agricultural famrs
and it was necessary to have the points of production to be close to the points of consumption.
The farmer would obviously sell their produce within the limits of their physical reach. The
industrial revolution changed the way producers started looking at providing reach to their
customers/consumers.
Industrialization also resulted in urbanization. While industrialization required
“movement” of raw materials and the means of making production happen – machinery and
equipment etc., these added new dimensions to distribution – creating an assortment,
transportation, etc., which brought “traders” into the system.
After the second World War, the US Economy seems to have ended up with huge
stockpiles of inventory which needed to be marketed in order to release valuable working
capital. The concept of branding was becoming apparent as economies of scale ensured high
levels of production and inventories. Distribution by now was relevant only for the “place” part of
the marketing mix. The effort put on “selling” spawned a host of independent intermediaries in
the form of wholesalers and retailers.
Two major developments in the US also impacted the distribution networks – the
automobile and the highway systems. It was now possible to move merchandise to previously
inaccessible locations. At this point, American citizens seemed to be moving to the suburbs, and
retailers also started moving to these locations – suburban shopping centers and later malls got
developed.

The early 1950s are credited with laying the foundation of the marketing concept which
meant each channel member had to work toward meeting the needs of the customers. The pull
concept was taking shape. Gathering and using customer information became the norm. The
next stage was into “relationship marketing” which meant mere transactions were not enough –
relationships were required to be built for the long-lasting and long business results.
Sophisticated databases and interactive technologies became a big support to pursue this
strategy.
nd
Source: (Havaldar, K. (2012) Sales and Distribution Management: Text and Cases 2 Edition, Tata McGraw Hill
Education Private Limited, p.262)

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The Nature of Marketing Channels

As mentioned by Rosenbloom, marketing channels (or channel of distribution, or trade

channel) is a group of interrelated intermediaries who direct products to customers.
Merchants and agents are the two types of marketing intermediaries. Merchants take
title to merchandise and resell it, while agents receive a commission or fee for expediting
exchange. Wholesalers and retailers are both intermediaries and can be either merchants or
agents. Because of this distinction, we sometimes will distinguish between wholesalers (when
they are assumed to be merchants) and agents, who do not take title to products.
Channel members have different responsibilities within the overall structure of the
distribution system, but mutual profit and success can be attained only if channel members
cooperate in delivering decisions, because channels and distribution affect product, price, and
promotion decisions. Channel decisions are not always made prior to other marketing decisions,
but they exercise a powerful influence on the rest of the marketing mix.
Another significant aspect of marketing channels is that relationships among channel
members (producers, wholesalers, and retailers) usually involved not just a short but a long
term commitment. While prices usually can be changed and producers may have considerable
control over products and promotion, marketing channels are less flexible. Sometimes there are
legal commitments to intermediaries, and replacing or bypassing an intermediary requires extra
efforts or responsibilities.
th
Source: (Rosenbloom, B. (2012), Marketing Channels 8 Edition, Cengage Learning, United States. 73)

The Marketing Channel and the Environment

The environment consists of all macroenvironment or external uncontrollable factors
within which marketing channels exist. These are the natural, economic, competitive,
sociocultural, technological, and the legal environment. You may have heard of these as the
SPEET or PESTLE from other sources.

BEHAVIOURAL PROCESSES OF MARKETING CHANNELS

The Marketing Channel as a Social System

The system generated by any process of interaction on the sociocultural level between
two or more actors. The actor is either a concrete human individual or a collectivity. When these
individuals or collectivities interact as member of the marketing channel, an inter-organizational
social system exists.

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Conflict in the Marketing Channel
Conflict exists when a member of the marketing channel perceives another member’s
actions impeded the attainment of their goals. Although there are many causes of channel
conflict, most can be placed into one or more of the following seven categories:
1. Role incongruities: Members of the marketing channel have a series of roles they are
expected to fulfill. If a member deviates from the given role, a conflict situation may
result.

2. Resource scarcities: Sometimes conflict stems from a disagreement between channel

members over the allocation of some valuable resources needed to achieve their
respective goals.

3. Perceptual differences: Perception refers to the way an individual selects and

interprets environmental stimuli. The way such stimuli are perceived are often quite
different from objective reality.

4. Expectational differences: Various channel members have expectations about the

behaviour of other channel members. These expectations are predictions or forecasts
concerning the future behaviour of other channel members. Sometimes these forecasts
turn out inaccurate, but the channel member who makes the forecast will take action
based upon the predicted outcomes – thus the channel conflict.

5. Decision domain disagreements: Channel members explicitly or implicitly carve out for
themselves an area of decision-making that they feel is exclusively theirs. Hence,
conflicts arise over which member has the right to make what decisions. The area of
pricing decision has traditionally been a pervasive example of such conflict.

6. Goal incompatibilities: Each member of the marketing channel has their own goals.
Situations in the organization will hardly be overcome by having differences in setting
goals.

7. Communication difficulties: Communication is the creative vehicle for all interactions

among channel members, whether such interactions are cooperative or conflicting.

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Power in the Marketing Channel
1. Reward – a monetary way of showing excellency in the organization

2. Coercive – to punish a member upon failure to conform to the influence attempts of a

different member.

3. Legitimate – it is the obligation that exists to accept such influence.

4. Referent – one channel member determines the goals to be closely allied to another
member, possibly of that one other member’s high status, skill, etc.

5. Expert – the power based on the knowledge or technically-equipped in one area of

specialization

Behavioural Problems in Channel Communications

1. Differing goals – corporate management in manufacturing firms translate into aggressive
effort to increase high sales volume. Channel members should attempt to understand
the goals of their channel members to learn whether they are much different from those
of their own firms.

2. Language differences – The other basic communication problem between the

manufacturer and channel members sometimes focuses on terminologies used by
professional corporate management. The Channel has to ensure that the language used
in channel communications is well-understood and presented by all channel members.

3. Perceptual differences – this happens among channel members on a wide variety of

issues. It is therefore important that channel managers spell out such issues as delivery
time, margin and discounts, return privilege, warranty provisions, and so forth; so that
the channel members have the same understanding as the channel manager.

4. Secretive behaviour – it is the idea on not divulging or sharing information, such as an

upcoming promotional plan. Manufacturers fail to get potentially valuable feedback from
channel members on whether or not the plan will be effective.

5. Inadequate frequency of communication – the association of infrequent communication

with lower quality communication applies. A channel manager must ensure that they
communicate as frequently as necessary with all channel members to ensure that quality
of communication is not compromised.

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STRATEGY OF MARKETING CHANNELS
Marketing channel strategy is defined by the broad principles by which the firm expects
to achieve its distribution objectives for its target markets. To achieve its objectives, a firm will
have to address six basic distribution decisions:
1. What role should distribution play in the firm’s overall objectives and strategies?

2. What role should distribution play in the marketing mix?

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

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

5. How can the marketing channel be managed to implement the firm’s channel design
effectively and efficiently on a continuing basis?

6. How can channel member performance be evaluated?

A sound approach to dealing with distribution decisions is to formulate marketing

channel strategies to provide the guiding principles for dealing with distribution decisions on
a proactive basis, rather than a reactive one.

Marketing Channel Strategy and the Role of Distribution in Corporate Objectives and
Strategy
The most fundamental distribution decision for any firm or organization to consider is the
role that distribution is expected to play in a company’s long-term overall objectives and
strategies. The role of distribution should be considered by the highest management levels of
the organization.
When this three-cycle planning process is undertaken in a large and diversified firm, all
three levels (corporate, business, and programme/functional departments) will become involved
in the strategic planning process.

Channel Strategy and Managing the Marketing Channel

Channel management from the manufacturer’s perspective involves all of the plans and
actions taken by the manufacturer aimed at securing the cooperation of the channel members in
achieving the manufacturer’s distribution objectives.
The channel manager attempting to plan and implement a program to gain the
cooperation of channel members is faced with three strategic questions:
1. How close a relationship should be developed with the channel members?

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 2. How should the channel members be motivated to cooperate in achieving the
manufacturer’s distribution objectives?

3. How should the marketing mix be used to enhance channel member cooperation?

Let us now peer into these three questions in a deeper perspective.

1. Closeness of Channel Relationships

How close a channel relationship should any given manufacturer develop with
their channel members is really a question of strategy.

If a channel member believes that a close working relationship will help them do
a better job of managing the channel and achieve the distribution objectives, then
closeness should be emphasized. On the other hand, if the channel manager
believes that closeness is not necessary for effective management of the
channel, then it is probably a waste of time and money to do so. As a rough
strategic guide for dealing with the closeness question, the channel manager can
relate it to the degree of distribution intensity needed for the manufacturer’s
products.

2. Motivation of Channel Members

When motivating channel members, whether at the wholesale or retail levels, the
strategic challenge is to find the means to secure strong channel member
cooperation in achieving distribution objectives. Channel strategy in this context
involves whatever ideas and plans the channel manager can devise to achieve
that result.

3. Use of the Marketing Mix in Channel Management

Optimizing the marketing mix to meet the demands of the target market requires
not only excellent strategy in each of the four strategic variables of the marketing
mix, but also an understanding of the relationships or interfaces among them.

From the standpoint of distribution and particularly of managing the marketing

channel, the channel manager should keep the strategic concept of developing
synergy clearly in mind.

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Assessment

Answer the following questions concisely.

1. Why is it necessary to consider the marketing strategies in the distribution process?

2. How are producers and manufacturers related to each other?

3. Give an example of a cause of channel conflict.

4. How does the environment of marketing channels help in developing marketing

strategies?

5. Explain the importance of the role of the producer and end-user in the marketing
channel.

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Lesson 6 : Designing Marketing Channels

Designing channels is important so that the marketer will know what kind of channel will
prove to be the most effective and efficient to reach out to their desired target market. This
lesson will emphasize on designing and choosing these said marketing channels.

At the end of this lesson, you should be able to:

• Design marketing channels

• Decide channel designs through various phases and select members and partners for it
• Think of ways how to motivate channel members

CHANNEL DESIGN
Channel designs are decisions involving the development of new marketing channels
where none had existed before, or the modification of existing channels. It is presented as a
decision faced by the marketer, and it includes either setting up channels from scratch or
modifying existing channels. This is sometimes referred to as reengineering the channel and in
practice is more common than setting up channels from scratch. The term “design” implies that
the marketer is consciously and actively allocating the distribution tasks to develop an efficient
channel, and the term selection means the actual selection of channel members. Producers and
manufacturers, wholesalers, and retailers all face channel design decisions. Producers and
manufacturers “look down” the channel.

PHASES OF CHANNEL DESIGN DECISION

A paradigm of the Channel Design Decision

These channel design decisions can be broken down into seven phases or steps. These are:
1. Recognizing the need for a channel design decision
2. Setting and coordinating distribution objectives
3. Specifying the distribution tasks
4. Developing possible alternative channel structures
5. Evaluating the variable affecting channel structure
6. Choosing the “best” channel structure
7. Selecting the channel members
Let us now take a closer look at each phase.

Phase 1: Recognizing the Need for a Channel Design Decision

Many situations can indicate the need for a channel design decision. Among them are:
1. Developing a new product or product line
2. Aiming an existing product to a new target market
3. Making a major change in some other component of the marketing mix
4. Establishing a new firm

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 5. Adapting to changing intermediary policies
6. Dealing with changes in availability of particular kinds of intermediaries
7. Opening up new geographic marketing areas
8. Facing the occurrence of major environmental changes
9. Meeting the challenge of conflict or other behavioural problems
10. Reviewing and evaluating

Phase 2: Setting and Coordinating Distribution Objectives

In order to set distribution objectives that are well-coordinated with other marketing and
firm objectives, and strategies, the channel member needs to perform three tasks:
1. Become familiar with the objectives and strategies in the other marketing mix areas and
any other relevant objectives and strategies of the firm;
2. Set distribution objectives and state them explicitly; and
3. Check to see if the distribution objectives set are congruent with marketing and the other
general objectives and strategies of the firm

Let us take a closer look at these three tasks.

1. Become familiar with the objectives and strategies

Whoever is responsible for setting distribution objectives should also make an effort to
learn which existing objectives and strategies in the firm may impinge* the distribution
objectives. In practice, often the same individual(s) who set(s) objectives for other
components of the marketing mix will do so for distribution. (*impinge - impose; intrude;
invade)

2. Setting Explicit Distribution Objectives

Distribution objectives are essentially statements describing the part that distribution is
expected to play in achieving the firm’s overall marketing objectives.

3. Checking for Congruency

A congruency check verifies that the distribution objectives do not conflict with the other
areas of the marketing mix.
Now that all tasks are expounded upon, let us now move onto the next phase of the seven
phases we have mentioned earlier.

Phase 3: Specifying the Distribution Tasks

The job of the channel manager in outlining distribution functions or tasks is a much
more specific and situationally dependent one. The kinds of tasks required to meet specific
distribution objectives must be precisely stated.

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 In specifying distribution tasks, it is especially important not to underestimate what is
involved in making products and services conveniently available to final consumers.

Phase 4: Developing Possible Alternative Channel Structures

The channel manager should consider alternative ways of allocating distribution
objectives to achieve their distribution tasks. Often, the channel manager will choose more than
one channel structure in order to reach the target markets effectively and efficiently.
Whether single – or multiple – channel structures are chosen, the allocation alternatives
(possible channel structures) should be evaluated in terms of the following three dimensions,
plus an additional dimension to consider:
1. Number of levels in the channel
2. Intensity at the various levels
3. Type of intermediaries at each level
4. Number of possible channel structure alternatives
Let us take a closer look at these dimensions.
1. Number of levels in the channel
The number of levels in a channel can range from two levels – which is the most direct –
up to five levels and occasionally even higher

2. Intensity at the various levels

Intensity refers to the number of intermediaries at each level of the marketing channel.

• Intensive. It is sometimes called saturation which means that as many outlets as

possible are used at each level of the channel.

• Selective. It means that not all possible intermediaries are used, but rather those
included in the channel have been carefully chosen.

• Exclusive. It is a way of referring to a very highly selective pattern of distribution.

The intensity of distribution dimension is a very important aspect of channel structure

because it is often a key factor in the firm’s basic marketing strategy and will reflect the
firm’s overall corporate objectives and strategies.
3. Type of intermediaries at each level
The third dimension of channel structure deals with the particular types of intermediaries
to be used (if any) at the various levels of the channel. The channel manager should not
overlook new types of intermediaries that are emerging such as Internet companies.

4. Number of possible channel structure alternatives

Given that the channel manager should consider all three structural dimensions (level,
intensity, and type of intermediaries) in developing channel structures, there are, in
theory, a high number of possibilities. Fortunately, in practice, the number of feasible

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 alternatives for each dimension is often limited due to the number of current channel
members.

Let us now move onto the fifth phase of channel design.

Phase 5: Evaluating the Variables Affecting Channel Structure

The channel manager should then evaluate a number of variables to determine how they
are likely to influence various channel structures.

These six basic categories are most important:

1. Market Variables
Market variables are the most fundamental variables to consider when designing a
marketing channel. Four basic subcategories of market variables are particularly
important in influencing channel structure. They are (A) market geography, (B) market
size, (C) market density, and (D) market behaviour.

A. Market Geography
Market geography refers to the geographical size of the markets and their physical
location and distance from the producer and manufacturer. A popular heuristic (rule
of thumb) for relating market geography to channel design is : “The greater the
distance between the manufacturer and its markets, the higher the probability that
the use of intermediaries will be less expensive than direct distribution.”

B. Market Size
The number of customers making up a market (consumer or industrial) determines
the market size. From a channel design standpoint, the larger the number of
individual customers, the larger the market size.

C. Market Density
The number of buying units per unit of land area determines the density of the
market. In general, the less dense the market, the more difficult and expensive is
distribution. A heuristic for market density and channel structure is as follows: “The
less dense the market, the more likely it is that intermediaries will be used. Stated
conversely the greater the density of the market, the higher the likelihood of
eliminating intermediaries.”

D. Market Behaviour
Market behaviour refers to the following four types of buying behaviours:

i. How customers buy

ii. When customers buy
iii. Where customers buy
iv. Who does the buying
Each of these patterns of buying behaviour may have a significant effect on channel
structure.

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Let us now go back to looking at the second category out of six categories of variables that
determine the likeliness of influencing various channel structures.
2. Product Variables

Product variables such as bulk and weight, perishability, unit value, degree of
standardization (custom-made versus standardized), technical versus nontechnical, and
newness affect alternative channel structures.

i. Bulk and Weight

ii. Perishability
iii. Unit Value

Degree of Standardization

Custom-made products should go from producer to consumer while more

standardized products allow opportunity to lengthen the channel.

Technical versus Nontechnical

In the industrial market, a highly technical product will generally be distributed
through a direct channel. This is because the manufacturer may need sales and service
people capable of communicating the product’s technical features to the user.
In the consumer market, relatively technical products are usually distributed
through short channels for the same reasons.

Newness
New products, both industrial and consumer, require extensive and aggressive
promotion in the introductory stage to build demand. Usually, the longer the channel of
distribution, the more difficult it is to achieve this kind of promotional effort from all
channel members.
Therefore, a shorter channel is generally viewed as an advantage for new
products as a carefully selected group of intermediaries is more likely to provide
aggressive promotion.

And now, onto the remaining variables of the six mentioned variables from earlier.

3. Company Variables
The most important company variables affecting channel design are:
• Size
• Financial Capacity
• Managerial Expertise

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 • Objectives and Strategies
4. Intermediary Variables
The key intermediary variables related to channel structure are:
• Availability
• Cost
• Services

5. Environmental Variables
Economic, sociocultural, competitive, technological, and legal environmental forces can
have a significant impact on channel structure.

6. Behavioural Variables
The channel manager should review the behavioural variables discussed in Lesson 4.
Moreover, by keeping in mind the power bases available, the channel manager ensures
a realistic basis for influencing he channel members.

Onto phase six of the seven phases designing the channel structure.

Phase 6: Choosing the “Best” Channel Structure

In theory, the channel manager should choose an optimal structure that would offer the
desired level of effectiveness in performing the distribution tasks at the lowest possible cost. In
reality, choosing an optimal structure is not possible.
Why? First, as we pointed out in the section in Phase 4, management is not capable of
knowing all of the possible alternatives available to them.
Second, even if it was possible to specify all possible channel structures, precise
methods do not exist for calculating the exact payoffs associated with each alternative.
Some pioneering attempts at developing methods that are more exacting do appear in
literature and we will discuss these briefly.
A. “Characterstics of Goods and Parallel Systems” Approach

First laid out in the 1950’s by Aspinwall, the main emphasis for choosing a channel
structure should be based upon product variables. Each product characteristic is
identified with a particular colour on the spectrum. These variables are:

1. Replacement rate
2. Gross margin
3. Adjustment
4. Time of consumption
5. Searching time

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 Using Aspinwall’s Approach
This approach offers the channel manager a neat way of describing and relating
a number of heuristics about how product characteristics might affect channel structure.
The major problem with this method is that it puts too much emphasis on product
characteristics as the determinant of channel structure.

B. Financial Approach
Lambert offers another approach, which argues that the most important variable
for choosing a channel structure is financial. Basically, this decision involves comparing
estimated earnings on capital resulting from alternative channel structures in light of the
cost of capital to determine the most profitable channel.

Using the Financial Approach

By viewing the channel as a long-term investment that must more than cover the
cost of capital invested in it and provide a better return than other alternative uses for
capital, the criteria for choosing a channel structure is more rigorous. The major problem
with Lambert’s approach lies in the difficulty of making it operational in a channel
decision-making context.

C. Transaction Cost Analysis (TCA) Approach

Based on the work of Williamson, TCA addresses the choice of marketing

channel structure only in the most general case situation of choosing between the
manufacturer performing all of the distribution tasks itself through vertical integration
versus using independent intermediaries to perform some or most of the distribution
tasks. It is based upon opportunistic behaviours of channel members.

Using the TCA Approach

The main focus of TCA is on the cost of conducting the transactions necessary
for a firm to accomplish its distribution tasks. In order for the transactions to take place,
transaction-specific assets are needed. These are the set of unique assets, both tangible
and intangible, required to perform the distribution tasks.

D. Management Science Approaches

It would certainly be desirable if the channel manager could take all possible
channel structures, along with all the relevant variables, and “plug” these into a set of
equations, which would then yield the optimal channel structure.

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E. Judgmental-Heuristic Approaches

These approaches rely heavily on managerial judgment and heuristics for

decisions. Some attempt to formalize the decision-making process whereas others
attempt to incorporate cost and revenue data.

Straight Qualitative Judgment Approach

The qualitative approach is the crudest but, in practice, the most commonly used
approach for choosing channel structures. The various alternative channel structures
that have been generated are evaluated by management in terms of decision factors
that are thought to be important. These factors may include short and long-run cost and
profit considerations, channel control issues, long-term grown potential, and many
others.

Weighted Factor Score Approach

A more refined version of the straight qualitative approach to choosing among
channel alternatives is the weighted factor score approach.
This approach forces management to structure and quantify its judgments in
choosing a channel alternative and consists of four basic steps:
1. The decision factors must be stated explicitly.
2. Weights are assigned to each of the decision factor to reflect relative importance
precisely in percentage terms.
3. Each channel alternative is rated on each decision factor, on a scale of 1 to 10.
4. The overall weight factor score (total score) is computed for each channel alternative
by multiplying the factor weight (A) by the factor score (B).

Distribution Costing Approach

Under this approach, estimates of costs and revenues for different channel
alternatives are made, and the figures are compared to see how each alternative
compares to each other.
Regardless of how elaborate or detailed the analysis, the basic theme of this
approach stresses managerial judgment and estimations about what the costs and
revenues of various channel structure alternatives are likely to be.

Using the Judgmental-Heuristic Approaches

Regardless of which judgmental-heuristic approach is used, large doses of
judgment, estimation, and even “guesstimation” are virtually unavoidable.

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 This is not to say that the so-called judgmental-heuristic approaches are totally
subjective. Coupled with good empirical data, highly satisfactory (though not optimal)
channel choice decisions may be made using these approaches.
Judgmental-heuristic approaches also enable the channel manager to readily
incorporate nonfinancial criteria into channel choices. Such nonfinancial criteria as
goodwill or the degree of control over the channel members may be of real importance
to a firm.

The seventh phase has a section dedicated to it, as after you have followed all these six
phases, you will now decide which channel design to implement, as well as the channel
members and partners to be involved in it.

SELECTING CHANNEL MEMBERS AND PARTNERS

Channel Member Selection

This is the last phase of the channel design. Generally, the greater the intensity of
distribution, the less the emphasis on selection. In an intensive distribution pattern, the
intermediaries are “selected” only to the extent that they have the probability of paying the bills.
On the other hand, in case of selective distribution, the selection decisions become more critical
and are carefully scrutinized.

The Selection Process

This consists of the three steps:

1. Finding prospective channel members
2. Applying the selection criteria to determine the suitability of prospective channel
members
3. Securing the prospective channel members

Let us now take a closer look at the three above mentioned steps.

Finding prospective channel members

Variety of sources in order of importance are:

1. Field Sales Organizations

Company salespeople are in the best position to know potential channel

members, usually better than anyone else in the firm. Companies may not adequately
reward salespeople for their efforts in finding potential channel members.

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2. Trade Sources

Trade sources such as trade associations, trade publications, directories, trade

shows, and the “grapevine” are all valuable sources of information about prospective
members.

3. Reseller Inquiries

Many firms learn about potential channel members through direct inquiries from
intermediaries handling their products.

4. Customers

Customers of prospective intermediaries can be a source of information. Using

informal or formal surveys of the views of customers, a firm may well be able to gain
insights about the strengths and weaknesses of a prospective channel member from the
customer’s (end user) point of view.

5. Advertising

Advertisements in trade publications offer another approach to finding channel

members.

6. Trade Shows

Trade shows or conventions can be a very fruitful source for finding potential
channel members. Many trade associations, at the industrial and retail levels, hold
annual conventions at which numerous representatives from the various organizations
are represented.

7. Other sources

Some firms also find the following sources helpful in locating prospective members:

a. Chamber of commerce, banks, and local real estate dealers

b. Classified telephone directories or yellow pages
c. Direct-mail solicitations
d. Contacts from previous applications
e. Independent consultants
f. List brokers that sell lists of names of businesses
g. Business databases
h. The internet

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Securing the Prospective Channel Members

The supplier produces, the distributor sells, and each is dependent on the other.
Together, they form a team and teamwork is essential for the association to become mutually
beneficial.

Specific inducements for securing channel members

• Good profitable product line

• Advertising and promotional support
• Management assistance
• Fair dealing policies and friendly relationship

Types of Channel Partners

1. Product-oriented resellers are channel partners with a focus on reselling software or
hardware. This means that they require a wide range of products from many different
vendors.

2. Project-oriented resellers: The main difference between partners who resell software
and hardware and channel partners who complement their own solution with third party
products are these resellers’ focus.

The channel partners who focus on their own products and services will have a different
motivation for working than a reseller who is just looking for a good margin. Project-oriented
resellers want to use the product to increase the sales of their own product.

Reference: pg. 30, Stefan Ulzinger (2011) Channel Revolution, Hamburg, Deutschland, Lulu Publishing Company)

MOTIVATING CHANNEL MEMBERS

Motivating channel members includes efforts in designing capacity building programs,
training, promotions support, marketing research, and of course, working along with the
company sales personnel.

These persuasive powers are explained in a little more detail below:

1. Referent Power

This power emanates out of the eminent position that the company holds in the
industry. This power generates instant recognition and respect and any intermediary

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 associated with this kind of organization will automatically get a favourable rub-off this
image. Companies like Microsoft, Infosys, HUL, Telco, and Colgate have this referent
power in businesses in ethic they operate.

2. Expert Power

This implies that the company has some special knowledge that is value-adding
to the channel partner. This support could take the form of specialized knowledge on
developing business in which the company may train the sales personnel of the
distributors. The disadvantage of this kind of power is that it has limited utility unless the
company keeps developing valuable knowledge, which can continue to add value to the
intermediary.

3. Legitimate Power

This is enforcing any task expected of the intermediary as per the agreement or
contract signs with the company. The company has the right to get this work out of the
channel partner and the intermediary has the responsibility to deliver this expectation.

4. Support Power

The company using the channel partners for distribution of its goods and services
has the ability to give additional support to the channel partners to help increase
volumes. This support could be in the form of promotion on the product (both trade and
consumer-related) and subsides (like bearing a part of the distribution cost, cost of
auxiliary, salesmen employed by the distributors to increase coverage, etc.)

5. Competition Power

It is the method of generating “rivalry” among the channel partners so that they
try to “compete” on performing better than their peers. Sometimes this may be openly
organized sales contests with targets on volume and other parameters, or it could be the
constant comparisons which sales managers do in their meetings with channel partners,
when they rate the performance of all their partners and rank them in order of good
performance.

6. Reward Power

As the name implies, companies provide incentives to the channel partners to

perform additional tasks at specific points of time. This power is the most persuasive but
cannot be used to an extent where it may become a habit or get taken for granted.

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 7. Coercive Power

This is the power of “threat” used by the company to put defaulting channel
partners back on track. The threat could be taking away some support and even
discontinuing the channel partnership if the power does not do something which the
company wants them to do as part of the requirement to sell more of the product.

nd
Source: (p. 393-395, Havaldar, K. & Cavale, V.M. (2011) Sales and Distribution Management 2 Edition McGraw Hill
Education, Pennsylvania Plaza, New York City)

Dimensions of Motivation
1. Intensity. It is the magnitude of mental and physical effort put in by the salesperson for
their activity or goal. As this inner drive becomes more intense, more effort will be put in
by them.

2. Persistence. It is the extension of effort over time. This works when first dimension
“intensity” is high and so the person has high persistence to expend the needed effort for
the time period.

3. Direction. It implies that the individual can choose how their efforts will be spent.
Salespeople who are highly competitive and have high intensity and persistence will
attempt to determine what activities are required to reach those goals and direct their
behaviour.

st
Source: (Gupta, SI (2005) Sales and Distribution Management Text and Cases: An Indian Perspective 1 Edition
Published by Anurag Jain for Excell Books A-45, Naraina, Phase 1, New Delhi – 110 028)

Distribution Management | MARK 30023 61

Assessment

Answer the following questions concisely.

1. Among the number of variables, which is the most fundamental way to consider when
designing a marketing channel? Why?

2. What are the specific inducements for securing channel members? Why?

3. Give at least three examples of situations that indicate the need for a channel design
decision and explain.

4. Why does Aspinwall’s approach contain problems?

5. Explain how the paradigm of the channel design decision helps in the accomplishment of
organizational goals and objectives. Cite examples.

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Lesson 7 : Selecting Channel Partners

In this lesson, further specifics about selecting the right channel partners will be touched
upon. Issues that may arise as a result of choosing channels and partners for your business will
also be discussed, as well as remedies or solutions to counter these.

At the end of this lesson, you should be able to:

• Select your target market and channel design strategy

• Think of ways how to motivate the channel members
• Recognize product and pricing issues that may arise and how to counter these said
issues
• Learn how promotion works in marketing channels
• Plan for distribution and logistics

TARGET MARKET AND CHANNEL DESIGN STRATEGY

Markets to be Serviced
Sales policy of any company whether selling FMCG, industrial products or services
dictates that all markets with potential for doing business needs to be services. Resource
limitations prevent the same level of servicing for all markets. The sales manager’s prioritises
their markets and devotes maximum channel power in the most potential markets.
For industrial products, the customers are normally located in clusters and it is easier to
decide the market coverage for the dealers. In the case of consumer products and
pharmaceutical products, the markets are spread widely including a vast rural market. For these
kinds of products, the frequency of market coverage is decided based on the importance or
potential of the market and the prevalent competition. In either case, what competition does is
that it decides the kind of market coverage most of the time. The market coverage plan is
reflected in the beat plan of the channel partner.

Types of Customers

Consumers
A company who sells to individuals is sometimes referred to as a B2C company.
Consumers are somewhat difficult to profile because they are so varied in terms of their change
of priorities when their major life takes place.

Businesses
A company who sells to other companies is sometimes called a B2B company. In this
case, the customer profile might include such details as company size, type of industry, and
geographical location.

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Market Segments
Grouping of consumers or businesses within a particular market that has one or more
things in common. A target market often includes more than one market segment:

• Demographics
• Geographics
• Psychographics

th
Source: (Mariotti, Steve, Towle, and Tony (2010). Entrepreneurship: Owing Your Future 11 Edition. Pearson
Education, Inc.)

Segmentation means the splitting of the market into groups of end-users who are (a)
maximally similar within each group, and (b) maximally different between groups. For the
channel manager, segments are best defined on the basis of demands for the outputs of the
marketing channel. It is also a means of adding value to the product marketed through it. In this
sense, the marketing channel can be viewed as another production line engaged in producing
not the actual product that is sold, but the ancillary services that define how the product is sold.
The value added services by channel members and consumed by the end users along
with the product purchased are called service outputs, such as: bulk-breaking, spatial
convenience, waiting and delivery time, assortment and variety, customer service, and
product/market/usage information provision.
(Source: (p. 17, Barman, B (1996) Marketing Channel Canada)

Bulk Breaking
Manufacturers make huge batches of products; consumers want to consume just one
unit. Therefore, retailers buy in large quantities and offer the consumer exactly the quantity that
they want. On the other end of this trend are the so-called dollar stones, which offer very small
quantities of products at very low prices.

Spatial Convenience
This categorization depends on the extent of search or shopping activity of the consumer
that the said consumer is willing to undertake.

Waiting and Delivery Time

Consumers differ in their willingness to tolerate out-of-stock situations when they shop;
even the consumer exhibits differential willingness across different purchase occasions. Intense
demand translates into a demand that a product be in stock at all times by holding extra safety
stocks in their stores.

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Product Variety
It describes different classes of goods that constitute the product offering that is the
breadth of the product lines.

Source: (Palmatier, R., Stern, L. El Ansary, A. (2015) Marketing Channel Strategy Published by Pearson Education,
Inc., New York USA)

PRODUCT ISSUES IN CHANNEL MANAGEMENT

PRICING ISSUES IN CHANNEL MANAGEMENT

This is the most critical issue when dealing with channel partners whether they are on contract
or are independent. Like any other businessmen, they want prices which are favourable to give
them the highest margins. However, a limit to the margin affects the end price for the product to
be paid by the consumer.
The pricing mechanism for a consumer product works like this:

1. The end consumer price is decided based on the company costs, margins expected, and
what the competition is doing for similar products.

2. The permitted retail margins are known and hence, the price to the retailer can be
worked out from the maximum retail price. The prices in the market with independent
wholesalers and retailers also get affected by the promotions run by the companies.
However, the prices are negotiated and can vary between customers or even channel
partners. Even for the consumer durables, the discounts which companies operate can
vary between dealers so can the end consumer prices which may get influenced by
competition.

th
Source: (Havaldar, Krishna K., Cavale, V.M., (2012). Sales and Dstribution Management: Text and Cases 10
Edition. Tata McGraw Hill Education Private Limited. ISBN 978-1-25900875-7)

PROMOTION IN MARKETING CHANNELS

Basic Push Promotional Strategies in Marketing Channels

Promotional strategies emphasizing the push approach initiated by the manufacturer but
requiring channel member support and follow through can take man forms. Most can be placed
in the following seven categories:

1. Cooperative Advertising

One of the most pervasive forms of promotional assistance offered by the

manufacturer to channel members is that of cooperative advertising. One of the most

Distribution Management | MARK 30023 65

 common is the sharing of costs on a 50-50 basis up to some percentage of the retailer’s
purchases from the manufacturer.
For the manufacturer, the effectiveness of cooperative advertising as a
promotional strategy depends heavily on the level of support offered by the channel
members.

Specifically, the channel members must:

a. Have sufficient inventory of the advertise product
b. Offer adequate point-of-purchase display
c. Provide personal selling support if required
Getting this kind of support requires careful administration of the cooperative
programme by the manufacturer.

2. Promotional Allowances

The most typical strategy used for promotional allowances is to offer the channel
member a direct cash payment or a certain percentage of the purchases on particular
products. The allowances are offered to encourage retailers to buy more of the
manufacturer’s products, to give the products more prominent shelf space, to feature the
products in special floor or end-of-aisle displays, or to engage in other similar
promotional activity.

The availability of scanner data has made it feasible for manufacturers to

measure the effects of promotional programmes more accurately.

But, such measurements are taken after the fact. If a manufacturer wants to do
something up front to enhance channel member support and follow-through, the most
positive step to take is to make sure that the promotional allowance programme is
consistent with channel member needs.

3. Slotting Fees

Slotting fees or slotting allowances: Payments (either in cash or merchandise) by

manufacturers to persuade channel members, especially retailers, to stock, display, and
support new products.

The controversy over slotting fees has grown so intense that it has attracted the
attention of some members of Congress, the Federal Trade Commission, and the
General Accounting Office in the United States. They are investigating whether or not
this practice violates antitrust laws.

From the viewpoint of the channel manager, slotting fees must be viewed as a
reality. The channel manager should attempt to work with retailers to discover areas of

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 commonality leading to slotting fee arrangements that create more win-win, rather than
win-lose situations.

4. Displays and Selling Aids

It is estimated that $25 billion is spent each year on displays and selling aids in
all types of retail stores in the USA. Besides, point-of-purchase (POP) displays, other
common types of displays and selling aids include dealer identification signs,
promotional kits, special in-store displays, and mailing pieces.

Displays and selling aids can be highly effective, but quite often manufacturers
have difficulty getting retailers to use these materials. A wide disparity of perceived
usefulness of such materials often exists between the manufacturer and channel
members. Thus, the channel manager must make an effort to see whether the firm’s
selling aids and displays are serving any useful purpose or whether they are more of a
bother than a help.

5. In-store Promotions

Most in-store promotions are short-term events designed to create added interest
and excitement for the manufacturer’s products.

Regardless of the form of the in-store promotion, the key issue for the channel
manager is whether the retailers perceive benefits from it in the form of increased sales,
profits, or recognition for the store.

6. Contests and Incentives

Contests and incentives sponsored by manufacturers to stimulate channel member

sales efforts for their products are another popular form of promotion.

Sometimes the impact of a contest or incentive promotion can be increased by tying it to

some major event at the local, state, national, or even international level.

7. Special Promotional Deals and Merchandising Campaigns

Special promotional deals and merchandising campaigns comprise a catchall

category. It include a variety of push-type promotional deals such as discounts to
channel members to encourage them to order more products, favourable offers to
consumers to foster larger purchases, percentage or cents-off offers, rebates, coupons,
prizes, and premium offers.

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PLANNING FOR DISTRIBUTION AND LOGISTICS

(starts from page 188-191)

In order to ensure that the concept of total logistics is put into practice and that suitable
trade-offs are achieved, it is essential that a positive planning approach is adopted. In this
section, the various planning horizons with their associated logistics decisions are described.
These will then be developed into a more practical and detailed approach to logistics planning.
Planning should be undertaken according to a certain hierarchy that reflects different planning
time horizons. These are generally classified as strategic, tactical, and operational. They are
represented in Figure 1.2. There is an overlap between the main planning stages, which
emphasizes that there are many planning factors that can be covered by different stages in this
planning hierarchy.

The relative importance of these various aspects of logistics may differ between one
company and another. The choice of transport mode could, for example, be an initial strategic
decision and also a subsequent tactical decision for the same company. Figure 1.2 also
indicates the interrelationship of planning and control within this hierarchy. Both of these
elements are essential to the running of an effective and efficient logistics operation. One way to
foresee the operation is set up to run properly – it is “doing the right thing” or preparing and
planning the operation “effectively”; control is about managing the operation the right way – it is
“doing the right thing” or making sure that the operation is being run “efficiently”.

Figure 1.2 Logistics Planning Hierarchy

It is not relevant to define exactly which strategic, tactical, and operational decisions or
tasks within a company should be classified as either planning or control. Most elements need
to be planned correctly in the first place, and then subsequently they need to be monitored and
controlled to ensure that the operation is running as well as it should be.

Distribution Management | MARK 30023 68

 Some of the major aspects and differences between the three-time horizons are
summarized in Figure 1.3. The importance and relevance of these different aspects will vary
according to the type and scale of business, product, etc. It is helpful to be aware of the
planning horizon and the associated implications for each major decision that is made.

Figure 1.3 The major functions of the different planning time horizons

Figure 1.4 Some of the main logistics elements for the different planning time horizons

Distribution Management | MARK 30023 69

 The planning and control of an operation can also be described within the context
of a broader planning cycle. This emphasizes the need for a systematic approach where
continual review takes place. This is a particularly important concept in logistics, because most
operations need to be highly dynamic – they are subject to continual change, as both demand
and supply of goods as well as products regularly vary according to changes in customer
requirements for new products and better product availability. One example of a fairly common
framework is shown as the planning and control cycle in Figure 1.5.

The cycle begins with the question “Where are we now?” Here, the aim is to
provide a picture of the current position. This might be through an information feedback
procedure or through the use of a specific logistics or distribution audit. The second stage is to
determine the objectives of the logistics process, to identify what the operation should be trying
to achieve. These need to be related to such elements as the customer service requirements,
marketing decisions, etc. The third stage in the cycle is the planning process that spans the
strategic and operational levels previously discussed. Finally, there is a need for monitoring and
control procedures to measure the effectiveness of the distribution operation compared to the
plan. The cycle has then turned full circle, and the process is ready to begin again. This allows
for the dynamic nature of logistics, the need for continual review and revision of plans, policies,
and operations. This must be undertaken within a positive planning framework in order to
ensure that continuity and progress are maintained.

Figure 1.5 The planning and control cycle

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Distribution Management | MARK 30023 71
 Assessment

Answer the following questions concisely.

1. Why is it necessary to consider the three basic areas of product management?

2. Explain at least three principles of supply chain management.

3. What is Just-In-Time (JIT) Approach? Give an example.

4. Explain how advertising is a nonpersonal communication in promoting a product.

Give at least one example.

5. Give at least one push promotional strategy in marketing channels and explain.

Distribution Management | MARK 30023 72

LESSON 8 : EVALUATING CHANNEL MEMBER PERFORMANCE

This lesson emphasizes on evaluating the performance of each channel member. This
lesson will also deal primarily with the various ways of online distribution; its different types and
methodologies, as well as the most appropriate time to use said distribution.

At the end of this lesson, you should be able to:

• Learn the different types of channels used in businesses

• Identify which types are the most appropriate for your chosen business
• Be able to understand the Electronic Distribution System (EDS)

ONLINE CHANNEL SYSTEM AND MANAGEMENT

The empirical findings illustrate that firms following this path face very similar situations.
First, they are heavily challenged by pure online players that are increasing their market share.
Thus, firms are severely strained by radical decreases in turnover of core business segments,
and are therefore forced to address both integration dimensions simultaneously. Second,
customers begin to buy products online at significant levels and show interest in services such
as online research and offline pickup. Third, firms who set out on this transformation path have
already achieved a high degree of maturity in aligning channel specific information systems and
business processes, and in integrating all customer data in one centralized system.
Source: (Felix Brunner, Thomas Rudolph (2015) “Toward Cross-Channel Management” Walter de Gruyter Gmbh,
Berlin/Munich Boston ISBN 978-3-11-041698 e-ISBN (EPUB) 9783110417227)

Direct Marketing
Direct marketing consists of connecting directly with carefully targeted consumers, often
on a one-to-one, interactive basis. Using detailed databases, companies tailor their marketing
offers and communications to the needs of narrowly defined segments or individual buyers.
Beyond brand and relationship building, direct marketers usually seek a direct, immediate, and
measurable consumer response.

Customer Databases and Direct Marketing

Effective direct marketing begins with a good customer database. A customer database
is an organized collection of comprehensive data about individual customers or prospects. A
god customer database can be a potent relationship-building tool. The database gives
companies a 360-degree view of their customers and how they behave. A company is no better
than what it knows about its customers.

Marketing and the Internet

Online marketing efforts to market products and services and build customer
relationships over the internet, while internet is a vast public web of computer networks that

Distribution Management | MARK 30023 73

connects users of all types around the world to each other and an amazingly large information
repository.

Online and Offline Channels

Online channels categorize data for visitors who come through sources like a search
engine, Internet ad, referring domain, or email campaign. Offline channels apply to visitors who
found sites through television ads, newspapers, or magazine advertisements.

Online Distribution Channel

Two types of online distribution channels

1. Direct Channel

The website is the shop window. The sales strategy is oriented toward:
• Increasing traffic on the website
• Encourage the user to make a purchase
• Indirect Channel (retail agency, Tour Operators, etc.)

2. Direct Online Distribution

• The essential tools to attract potential customers
• Private financing
• SEO (Search Engine Optimization)
• SEM (Search Engine Marketing)
• Email Marketing
• Ads from affiliated networks
• Viral Marketing
• Guerrilla Marketing
• Mobile Marketing
• Social Media

Search Engine Optimization

• Web positioning
• Most widely used internet search engine: Google

Distribution Management | MARK 30023 74

Search Engine Marketing

• Situating our website among the “sponsored results”.

• In search engines, the website appears highlighted in the right hand margin of the page
and sometimes at the top of natural results.
• The advertiser pays when the user clicks on their link.
• Most used: Google Ad words

Email Marketing

• The information is sent out to a list of email contacts.

• It is widely used.
To get good results and generate business, you need to:
1. Create a database of email addresses.
2. Prepare the email content well and then send it.
3. Follow up and track.

NEVER use mass mail advertising without the customer’s consent to receive such information.

Affiliated Networks Adverts

• Online advertising though a network of partners: affiliate’s websites of blogs.

• Involved in this type of advertising: advertisers, affiliates, platforms (webpage, blog, user
community, forum…) and commission agents.

Viral Marketing

• “Word of mouth”.
• Techniques for increasing the brand image of the company

Guerilla Marketing

• Very useful for companies that have low incomes.

• The techniques are usually directed at specific market niches.
• Most usual techniques: Publishing of expert content. Sending newsletters. Creating a
blog.
• Blue jacking: promotional messages via Bluetooth to PCs and mobile.
• Active participation in fora.

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Mobile Marketing

• Marketing through portable devices

• Sending SMS or MMS messages for specific promotional campaigns
• Advertising on mobile apps

Social Media

• Involves the use of social media as a channel to promote tourism

• Users generate their own content on Facebook, Youtube, Instagram, Twitter, and other
sites

FRANCHISE MARKETING CHANNEL

A franchise is a continuing relationship in which a franchiser grants to a franchisee the
business rights to operate or sell a product. The franchiser originates the trade name, product,
method of operation, and so on. The franchisee, in return, pays the franchiser for the right to
use the name, product, or business methods. A franchise agreement between the two parties
usually has for 10 to 20 years, at which time the franchisee can renew the agreement with the
franchiser if both parties are agreeable.
Source: (Charles W. Lamb, Joseph H. Hair, Carl McDaniel (1998) “Library of Cataloguing-in Publication Data Fourth
Edition” International Thomson Publishing, USA ISBN-13: 978-0273-68752-2. ISBN-10:0-273-68752-2)

Franchise Concepts and Terminology

In the most general sense, a franchise is a legal agreement between two independent
parties whereby one of those parties grants a licence to the other party to sell a trademarked
product or service. The party who owns the trademarked product or service is the franchisor
while the party granted his right to sell the product or service is the franchisee.

Two Types of Franchise

1. Product Distribution Franchise

A licensed product or service that can be sold by the franchisee. Example: Ford.

2. Business Format Franchise

A licensed product or service, but the franchisor also provides the complete system
format for operating the business. Example: McDonald’s, Jollibee, etc.

Source: (p.445 Rosenbloom, B. (2012) “Marketing Channels: A Management View Eighth Edition” Cengage Learning
Inc., Boston)

Distribution Management | MARK 30023 76

MARKETING CHANNELS FOR SERVICE
A marketing channel is a set of practices or activities necessary to transfer the
ownership of goods from the point of production to the point of consumption. It is the way
products and services get to the end-user, the consumer; and is also known as a distribution
channel. A marketing channel is a useful tool for management, and is crucial to creating an
effective and well-planned marketing strategy.
Another less known form of the marketing channel is the Dual Distribution channel. This
channel is a less traditional form that allows the manufacturer or wholesaler to reach the end-
user by using more than one distribution channel. The producer can simultaneously reach the
consumer through another channel, i.e., a store. An example of this type of channel would be
franchising.

Distribution Management | MARK 30023 77

Assessment

Answer the following questions concisely.

1. What is direct marketing? Give at least one example.

2. What is social media? Explain its effectiveness, even by your own observations.

3. What is the guerilla marketing? Give examples.

4. Why do you think it’s not a good idea to use mass mail advertising without the
customer’s consent to receive such information?

5. Describe the online channel system and management.

Distribution Management | MARK 30023 78

LESSON 9 : CONTEXT OF CHANNEL MANAGEMENT AND DISTRIBUTION

An even deeper insight to channel management and distribution in our ever-dynamic

world. In this lesson, we will see the different modern challenges of channel management and
distribution in the new millennium.

At the end of this lesson, you should be able to:

• Learn the basics of information system and logistics

• Learn more about franchising
• Be mindful of the ethical and legal aspects of marketing management
• Be able to face the opportunities and challenges of the global environment and the new
millennium

INFORMATION SYSTEM AND LOGISTICS

It is somehow important to consider that the consistency of decision among managers in
the organization will really depend on the information gathered during the selling process
especially in the activity of distribution. The efficiency and effectiveness of any marketing
channel relies on the collection, creation, management, and communication of information.
Channel Information System (CIS) is basically needed to collect, store, and interpret
information in a manner that gives value to an organization’s function. Information system and
logistics provide an information database and the hardware and networks that help in the
collection, processing, and transmission of information. They differ in business-to-business
applications, retailing applications, business-to-consumer applications, and interactive
applications for buyers and users.

Four Primary Activities of Logistics Information System

1. Data flow from external sources
2. Processing and storage of information within Firm
3. Communication of data for storage or processing the decision maker in the form of
reports
4. Communication of decision to customers and their feedback

FRANCHISING

An accelerated method to expand distribution coverage is through franchising. Examples are:

• Fastfood restaurants like Jollibee and McDonald’s

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 • Water refill stations like Aqua Vida
In franchising. A franchise fee is paid to the franchise owner in exchange of an established
brand name, a proven system of operation, training, and other infrastructure support.
The rule of thumb is to have at least 100,000 potential qualified customers for every franchise.
This is the reason why there are times when we encounter many of the same stores located
very near each other, especially in shopping centres. It is said that franchising offers a high 90%
success rate given all the elements present in a typical franchise store.

Types of Franchises
Product distribution franchises simply sell the franchisor’s products and are supplier-
dealer relationships. In product distribution franchising, the franchisor licenses its trademark and
logo to the franchisees but typically does not provide them with an entire system for running
their business. The industries where you most often find this type of franchising are soft drink
distributors, automobile dealers, and gas stations. Some familiar product distribution franchises
include:

• Pepsi
• Exxon
• Ford Motor Company

Business format franchises, on the other hand, not only use a franchisor’s product,
service, and trademark, but also the complete method to conduct the business itself, such as
the marketing plan and operations manuals. Business format franchises are the most common
type of franchise. USA Today reported that the 10 most popular franchising opportunities are in
these industries:

• Fastfood
• Retail
• Service
• Automotive
• Restaurants
• Maintenance
• Building and construction
• Retail – food
• Business services
• Lodging
Source: (Beshel, Barbara, (2001). An introduction to Franchising. IFA Educational Foundation. 1350 New York
Avenue, NW, Suite 900 Washington DC 2005. P 1-2; 5)

ETHICAL AND LEGAL ASPECTS OF CHANNEL MANAGEMENT

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 The legality of certain practices, including exclusive dealing, exclusive territories, tying
agreements, and dealers’ rights.
1. Exclusive dealing. A strategy in which the seller allows only certain outlets to carry its
products is called exclusive distribution, and when the seller requires that these dealers
not handle competitors’ products, this is called exclusive dealing. Both parties benefit
from exclusive arrangements: The seller obtains more loyal and dependable outlets, and
the dealers obtain a steady source of supply of special products and stronger seller
support. Exclusive arrangements are legal as long as (1) they do not substantially lessen
competition or tend to create a monopoly, and (2) both parties have voluntarily entered
into the agreement.

2. Exclusive territories. Exclusive dealing often includes exclusive territorial agreements.

The producer may agree not to sell to other dealers in a given area, or the dealer ma
agree to sell only in its own territory. The first practice has no legal obligation to sell
through more outlets than it wishes. The second practice, whereby the producer tries to
keep a dealer from selling outside its territory, is a major legal issue.

3. Tying agreements. The producer of a strong brand sometimes sells it to dealers only if
they will take some or all of the rest of the line. This practice is called full-line forcing.
Such tying agreements are not necessarily illegal, but they do violate U.S. laws if they
tend to lessen competition substantially.

4. Dealers’ rights. Producers are free to select their dealers, but their right to terminate
dealers is somewhat restricted. In general, sellers can drop dealers “for a cause”. But
they cannot drop dealers if, for example, the dealers refuse to cooperate in a doubtful
legal arrangement, such as exclusive dealing or tying agreements.

th
Source: (Kotler, Philip, (2000) Marketing Management: Millennium Edition 10 Edition. Pearson Custom Publishin 75
Arlington Street, Suite 300, Boston, MA 02116.)

Legal Issues in Chain Management

1. Dual Distribution: They use two or more marketing channels to distribute the same
products to the same target market. Considered illegal when the manufacturer uses
company-owned outlets to force independent retailers out of business by undercutting
their prices.

2. Restricted Sales Territory: Favoured by intermediaries to protect a sales territory.

Conflicting rulings by the courts regarding the restraint of trade.

3. Tying Agreements: An agreement where the manufacturer requires intermediaries to

purchase other products in addition to the most popular items. The related practice of
line forcing, where the manufacturer requires the intermediary to carry the entire line,
Deemed okay by the courts if they are able to carry competing products.

4. Exclusivity: An agreement where the manufacturer forbids intermediaries carry

competing products. Deemed illegal if:

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 • The deal blocks as much as 10% of market share
• The sales revenue is deemed “sizable”
• The manufacturer is larger and intimidating to the intermediary

5. Refusal to Deal: The courts have held that manufacturers whave the right to choose
channel members with which they will do business. However, within existing channels,
manufacturers may not legally refuse to deal with intermediaries merely because they
resist policies that are anticompetitive or restrain trade.
Source: (p.82 Debra L. Scammon and Mary Jane Sheffet. (1986). Journal of Public & Marketing Vol. 5)

GLOBAL CHALLENGES AND OPPORTUNITIES

1. Unstable governments: High indebtedness, high inflation, and high unemployment in
several countries have resulted in unstable governments that expose foreign firms to the
risks of expropriation, nationalization, and limits on profit repatriation. Many companies
buy political-risk-assessment reports such as Business International’s (BI) Country
Assessment Service, BERI, or Frost & Sullivan’s World Political Risk Forecasts

2. Foreign-exchange Problems: High indebtedness and economic and political instability

decrease the value of a country’s currency. Foreign firms want payment in hard currency
with profit-repatriation rights, but these options are not available in many markets.

3. Foreign-government entry: Governments place many regulations on foreign firms. For

example, they might require joint ventures with the majority share going to the domestic
partner, a high number of nationals to be hired, transfer of technology know-how, and
limits on profit repatriation.

4. Tariffs and other trade barriers: Governments often impose high tariffs to protect their
industries. They also resort to invisible trade barriers such as slowing down important
approvals and inspections, and requiring costly product adjustments.

5. High cost of product: A company going abroad must study each foreign market carefully,
become sensitive to its economics, laws, politics, and culture, and adapt its products and
communications to each market’s tastes.

6. Shifting borders: National borders are fundamental to marketing because they dominate
and shape economic behaviour within the country’s borders. Changing boundaries may
mean moving targets for marketers.

Too many U.S. manufacturers think their job is done once the product leaves the factory. They
should pay attention to how the product moves within the foreign country. They should take a
whole-channel view of the problem of distributing products to final users.
This shows the three major links between seller and ultimate user. In the first link, seller’s
international marketing headquarters, the export department or international division makes

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decisions on channels and other marketing mix elements. The second link, channels between
nations get the products to the borders of a foreign nation. The decisions in this link include the
types of intermediaries (agents, trading companies) that will be used, the type of transportation
(air, sea), and the financing and risk arrangements. The third link, channels within foreign
nations get the products from their entry point to final buyers and users. Within country
distribution channels vary considerably among countries.

More challenges
1. Technology in Global Expansion: Having the appropriate business technique and
information technology in place is as critical to global expansion and a favourable
outcome as it is to domestic operations. Many firms that expand into other markets fail,
not because the approach or products are poor, but because they keep introducing new
techniques and processes. Nevertheless, the technology platform that a a retailer
applies can literally bee a barrier to success if the resolution is territorial and not globally
applicable. This is becoming a critical aspect because as retailers progressively
concentrate on going global, standardization becomes a key differentiator. Once a
retailer goes global, IT requirements become more complicated because when the
retailer is working with a global provider, it needs to enter into particular connections or
contracts in different countries to supply its needs.

2. The increasing fuel and food prices, recession, along with government-impost austerity*
measures have reduced discretionary spending worldwide because many retailers
intend to expand by having new bricks and mortar stores. (*severity; strictness)

3. The challenge of non-standardization across the boundary in the global retail activity,
such as specific characteristic of being different in particular goods because of
international suppliers.

4. The challenge of retailing innovations. The retailers that opt for globalization must
concentrate on retail innovations in different markets. Typically, there are three
categories of markets: mature, emerging, and less developed markets. Retailers will be
challenged to come up with goods and services that can adapt into these markets. The
only result for international retailers is to design curtain goods that can adapt into each
market; this can be time-consuming, as resources may not be wholly applied.

5. Global expansion is risky because retailers adopting this expansion strategy must
understand the differences in local cultures and traditions. For instance, at its domestic
market, the retailers can easily begin their strategies in establishing their firms and
techniques to promote their product or services. However, the culture will make the firm
to operate differently at other countries.

More opportunities
1. Global Franchising Opportunity: Taking a franchise brand worldwide is, theoretically,
the final border for development. It is where many franchise brands that have started

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 successfully in the U.S. go to when they pursue extension. This strategy often goes in
parts due to progress that has saturated national markets and countries. Eventually, the
franchise idea is built around simplicity, infrastructure, streamlines, and replication
operations. What works in one place normally works in another.

2. Diverse Offer in Emerging Markets: Establishing a favourable private label offer is

important if retailers are reinforcing their valued credentials. A huge number of the
highlighted retailers have done this favourably in the emerging markets in which they
perform. On the other hand, the second trend accepted among those retailers, which are
successful in emerging markets, is format diversity. For instance, many retailers that are
doing a specifically powerful job in their markets have more than one storm format. This
does not only guide them to understand what works and what does not, but also
empowers them to meet the needs of a broad range of customer groups and every
shopping occasion. Although not all of them will function, having a broad range of
formats support insulation against those that are not functioning.

3. Capture new huge market size

4. Global urbanization: As one panelist said, “The world’s population is undergoing a

historic shift from rural to urban.” Higher consumer incomes and increased customer
concentration will present considerable opportunities for the retail sector.

Source: (Pg. 9 Yupal, S., & Gandhavi, D. (2012). Retailing and Innovation: A Study in Today’s Global Retail Market.
Advances in Management)

THE CHANNEL MANAGEMENT FOR THE NEW MILLENNIUM

Changing Models and Demands of Distribution Channels

The standards for achieving customer satisfaction have clearly changed. Examples of
the importance of exchange utility are virtually endless. Take for example the notion of time
utility. Many consumers have come to expect one-hour service on everything from film
processing to prescription eyeglasses. Time utility applies to each link in the marketing channel.
Emergent information technologies have changed the rules by which fast service is judged.
From JIT manufacturing to quick-response retailing, time-saving tools for managing the flows of
goods and services have become expected in marketing channels.

Growth of Extramediaries
Extramediaries enjoy the capacity to enhance exchange relationships by filling value gaps. The
decline of traditional channel roles (i.e., merchants, wholesalers, and brokers). Many traditional
channel roles will be replaced by highly specialized intermediaries.
1. Reassurance and Social Responsibility

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 Consumers faced with less control (globalization/internet) will seek greater
reassurance via credibility factors (Social responsibility/triple bottom lines, etc.)
and this protection will be backed by global government pressure.

2. More Movement Towards Indirect Channels

The introduction of electronic commerce in more industries is decreasing the

need for large back-room processing operations, e.g., the travel industry
consumer banking, other services such as insurance, etc. The expansion of
electronic commerce for business-to-business and business-to-consumer sales.
More call centers. The diversification of retailing channels. Electronic commerce
sounds deeply unfashionable and untrendy, but the reality is somewhat different.
It will deeply affect many industries from consumer banking, various sectors of
the travel industry and all forms of retailing and also many business-to-business
operations.

3. Relationships and the Interaction Process

The future of marketing channels lies in the long-term, ongoing, and flexible
relationships.” In the future, channel settings interaction processes will be
increasingly open and will feature a multilayered sharing of information and
resources.
Several other projections pertaining to interaction processes within marketing channel
settings:

• Network Development. Increasing numbers of complex networks will develop between

channel members. Channel members will literally connect with one another in an
expanding number of ways in the next decade.

• Standard Information Formats. A movement toward the standardized formats will

expedite goods, services, and information flows. Obstacles and bottlenecks in channels
of distribution will thus be reduced.

• Increased Interdependency. The continued emergence of strategic alliances and

channel networks will serve as a catalyst for additional structural changes in marketing
channels. In particular, channel designs should become shorter.

Source: (Pg. 408 Rushton, Alan, Croucher, Phil, Braker, Peter (2014), The Handbook of Logistics and Distribution
Management Fifth Edition: Understanding the Supply Chain. Kogan Page Limited)

Hybrid Channels and Multichannel Marketing

In multichannel marketing, each channel targets a different segment of buyers, or
different need states for one buyer, and delivers the right products in the right places in the right
way at the least cost. When this doesn’t happen, there can be channel conflict, excessive cost,
or insufficient demand.

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 Launched in 1976, Dial-a-Mattress successfully grew for three decades by selling
mattresses directly over the phone and, later, the Internet. A major expansion into 50 brick-and-
mortar stores in major metro areas was a failure, however. Secondary locations, chosen
because management considered prime locations too expensive, could not generate enough
customer traffic. The company eventually declared bankruptcy. On the other hand, when a
major catalog and internet retailer invested significantly in brick-and-mortar stores, different
results emerged. Customers near the store purchased through the catalogue less frequently,
but their Internet purchases were unchanged.
As it turned out, customers who liked to spend time browsing were happy to either use a
catalogue or visit the store; those channels were interchangeable. Customers who used the
Internet, on the other hand, were more transaction focused and interested in efficiency, so they
were less affected by the introduction of stores. Returns and exchanges at the stores were
found to increase because of ease and accessibility, but extra purchases made by customers
returning or exchanging at the store offset any revenue deficit. Companies that manage hybrid
channels clearly must make sure their channels work well together and match each target
customer’s preferred ways of doing business. Customers expect channel integration, which
allows them to:

• Order a product online and pick it up at a convenient retail location.

• Return an online-ordered product to a nearby store of the retailer.
• Receive discounts and promotional offers based on total online and offline
purchases.
th
Source: (Pages 416-417 Kotler, P. & Keller, K.L. (2012). Marketing Management 14 Edition. Prentice Hall, One Lake
Street, Upper Saddle River, New Jersey)

B2B E-Commerce
Although business-to-consumer (B2C) websites have attracted much attention in the
media, even more activity is being conducted on business-to-business (B2B) sites, which are
changing the supplier-customer relationship in profound ways. In the past, buyers exerted a lot
of effort to gather information about worldwide suppliers.
B2B sites make markets more efficient, giving buyers easy access to a great deal of information
from
1. supplier websites;

2. infomediaries, third parties that add value by aggregating information about alternatives;

3. market makers, third parties that link buyers and sellers; and

4. customer communities, where buyers can swap stories about suppliers’ products and
services.

Firms are using B2B auction sites, spot exchanges, online product catalogues, barter sites,
and other online resources to obtain better prices. Ironically, the largest of the B2B market

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makers is Alibaba, homegrown in China where businesses have faced decades of Communist
antipathy to private enterprise.

E-Commerce Today
E-Commerce refers to the use of the Internet and the Web to transact business. More
formally, e-commerce is about digitally enabled commercial transactions between and among
organizations and individuals. For the most part, this means transactions that occur over the
Internet and the Web. Commercial transactions involve the exchange of value (e.g., money)
across organizational or individual boundaries in return for products and services.

Types of E-Commerce
There are many ways to classify electronic commerce transactions – one if by looking at
the nature of the participants. The three major electronic commerce categories are B2C, B2B,
and C2C e-commerce.

1. Business-to-Consumer (B2C) electronic commerce involves retailing products and

services to individual shoppers.

2. Business-to-Business (B2B) electronic commerce involves sales of goods and

services among businesses

3. Consumer-to-Consumer (C2C) electronic commerce involves consumers selling

directly to consumers. For example, eBay, the giant Web auction site, enables people to
sell their goods to other consumers by auctioning their merchandise off to the highest
bidder, or for a fixed price.

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Assessment

Answer the following questions concisely.

1. Explain franchising.

2. What are the ethical and legal aspects of channel relations? Explain.

3. What is logistics? Give at least one example.

4. Give one type of e-commerce and give a concrete example of it.

5. What benefit do we get from extramediaries? Give one and explain.

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& REFERENCES
Distribution Management, Marife Agustin-Acierto and Gilfred Abad-Acierto, and Annabelle
Gordonas

Fundamentals of Marketing in the Philippine Setting, Josiah Go

Marketing Principles and their Applications, Julita del Rosario-Gomez

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