Chapter 6 Designing the Marketing Channel**. 6 Major Topics for Ch. 6 1.Channel Design Paradigm (7 steps)** 2.Channel Goals** 3.Properties of Channel.
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Chapter 6Chapter 6
Designing the Marketing Channel**
66Major Topics for Ch. 6
1. Channel Design Paradigm (7 steps)**2. Channel Goals**3. Properties of Channel Tasks
(Functions)**4. Three Dimensions of Channel Structure**5. Three Main Approaches for Choosing a
Channel Structure**6. Three Analysis Steps to Consider for
Selecting the Best Channel**
Channel DesignChannel Design
66Topic 1:
Decisions involving the development of new marketing channels either where none had
previously existed or to the modification of existing channels
Channel Design:
66Channel DesignChannel Design
1. A decision made by the marketer2. The creation or modification of
channels3. The active allocation of distribution
tasks in an attempt to develop an efficient structure*
4. The selection of channel members*5. A strategic tool for gaining a
differential advantage
Key points of the definition include:
66Who Engages in Channel Who Engages in Channel
Design?*Design?*
• Producers, manufacturers, serviceproviders, franchisors
• Look down the channel
toward the market
• Look up the channel
to secure suppliers
• Look both up and down
the channel
Firms(Manufacturers)
WholesalersRetailers
* Who is missing here?
66Channel Design Paradigm**Channel Design Paradigm**(Seven Step Process)(Seven Step Process)
1. Recognize the need forchannel design decision
1. Recognize the need forchannel design decision
7. Selectchannel members
7. Selectchannel members
5. Evaluaterelevant variables
5. Evaluaterelevant variables
6. Choose the “best”channel structure
6. Choose the “best”channel structure
2. Set & coordinatedistribution objectives
2. Set & coordinatedistribution objectives
3. Specifydistribution tasks
3. Specifydistribution tasks
4. Develop alternative channel structures*
4. Develop alternative channel structures*
66
Distribution Objectives (Goals)Distribution Objectives (Goals)Topic 2
Setting distribution objectives requires knowledge of which objectives & strategies may impinge on these distribution objectives.
Three Key Channel Goals*
• Efficiency: “no better alternative is available that is universally preferred”
• Control vs. Flexibility
Internal Cohesiveness vs. External Adaptiveness
• Learning and Knowledge
* Intermediate Goals
Distribution Channel Tasks Distribution Channel Tasks (Functions)(Functions)
66Topic 3
Outlining distribution tasks is specific and situationally dependent on the firm.
For example: Distribution tasks for a manufacturer of consumer products
differs from those for industrial products.
Distribution tasks are a function of the distribution objectives and the
types of firms involved.
=
Channel Tasks (Functions)* • This is a generic list of functions!• Major Channels Functions (Tasks)
• Physical Possession• Ownership• Promotion• Negotiation & Pricing• Financing• Risking• Order Processing• Payment Collection
Properties of Channel Tasks (Functions)**
• Usually performed better through specialization
• Can be shifted among channel members
• Invariably use someone’s resources*
• Key Question: Who can do the best job?
Matching! (channel functions with channel members)
Costs Associated with channel functions
• Physical Possession: Storage and delivery cost• Ownership: inventory carrying cost• Promotion: personal selling, advertising, sales promo, PR• Negotiation: time and legal cost• Financing: credit terms, terms and conditions of sale• Risk Taking: warranty, insurance, repair• Ordering: order-processing cost• Payment: collection, bad debt cost
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Allocating Five Marketing Functions in an Automobile Channel*
Information Function
Promotion Function
Customer
Customer
Customer
Customer
Advertising Agency
Suppliers
Suppliers
Suppliers
Suppliers
Suppliers
Physical Function
Title Function
Payment Function
Customer
Transporters
Warehouses
Manufacturer
Transporters
Warehouses
Dealers Transporters
Manufacturer
Dealers
Banks Manufacturer
Banks
Dealers
Banks
Transporters
Warehouses Banks
Manufacturer
Transporters
Warehouses Banks
Dealers
Transporters Banks
Manufacturer
Advertising Agency
Dealers
Exhibit 3.1
©McGraw-Hill Companies, Inc. 2002
Role Classifications for Different Types of Wholesalers
WholesalerClassification
Take Physical
Possession
Take Title to
Goods
Negotiation Function Performed
Promotional Function Performed
Merchant Wholesaler
Manufacturer’s Sales
OrganizationAgents/Brokers
Commission Merchants
Yes Yes Yes Yes
No Yes Yes Yes
No No Yes Yes
Yes No Yes Yes Exhibit 2.3
66Three Key Dimensions of Three Key Dimensions of
Channel Structure*Channel Structure*
Topic 4
2. Number of levels in the channel
1. Intensity at the various levels
3. Types ofintermediariesat each level
Allocation Alternatives
16
The Elements of Channel Design**
• Three Dimensions of Design Variation:
– Number of intermediaries at each level. Channel Intensity Issue
– Number of levels in the channel. Channel Level Issue
– Types of intermediaries used at each level. Channel Ownership and Function issue
©McGraw-Hill Companies, Inc. 2002
661. Number of Channel Levels1. Number of Channel Levels
• Range from zero to five or more• Number of alternatives is limited• Limitations result from the following
factors:– Particular industry practices– Nature & size of the market– Availability of intermediaries
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Consumer Channel Design
Producer
Zero-level
One-level
Two-level
Three-level
Consumer
Retailer
Retailer
Retailer
Wholesaler
Wholesaler Agent
Number of Levels
Exhibit 3.2
©McGraw-Hill Companies, Inc. 2002
19
Industrial Channel Design
Manufacturer
Zero-level
One-level
Two-level
Three-level
IndustrialUser
Industrial
Distributor
Manufacturer’s Representative
Number of Levels
Manufacturer’s Salesforce
Exhibit 3.2
©McGraw-Hill Companies, Inc. 2002
2. Intensity at the Various 2. Intensity at the Various Channel LevelsChannel Levels
66
Intensive Selective Exclusive
Many Few One
Intensity Dimension
Numbers of Intermediaries (retail level)
Relationship between the intensity of distribution dimension & number of retail intermediaries used in a
given market area
663. Types of Channel 3. Types of Channel IntermediariesIntermediaries
• Numerous types*• Manager’s emphasis on types of
distribution tasks performed by these intermediaries
• Watch emerging types– Electronic online auction firms (eBay)– Industrial products sold in B2B markets (Chemdex, Converge.com)
22
Channel Ownership and Function:Types of Intermediaries
• Manufacturer’s own sales force (direct)
• Online channel (direct)
• Manufacturer’s representatives (indirect)
• Industrial distributors (indirect)©McGraw-Hill Companies, Inc. 2002
66Variables Affecting Channel Variables Affecting Channel
StructureStructure
1. Market Variables*2. Product Variables*3. Company Variables*4. Intermediary Variables5. Environmental Variables
Categories of Variables
66
Market Geography Location, geographical size, & distance from producer
Market Size Number of customers in amarket
Market Density Number of buying units (consumers or industrial
firms)per unit of land area
Market Behavior Who buys, & how, when, and
where customers buy
1. Market Variables1. Market Variables
2. Product Variables2. Product Variables66
• Bulk & Weight• Perishability• Unit Value• Degree of Standardization• Technical versus Nontechnical• Newness
3. Company Variables3. Company Variables 66
Size The range of options isrelative to a firm’s size
Financial The greater the capital, theCapacity lower the dependence on
intermediaries
Managerial Intermediaries are necessaryExpertise when managerial experience
is lacking
Objectives Marketing & objectives may& Strategies limit use of intermediaries
4. Intermediary Variables4. Intermediary Variables 66
Availability Availability of intermediariesinfluences channel structure.
Cost Cost is always a consideration inchannel structure.
Services Services that intermediaries offer are
closely related to the selection of channel
members.
665. Environmental Variables5. Environmental Variables
The impact of environmental forces isa common reason for making
channel design decisions.
EconomicSociocultural
Competitive
Technological Legal
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How Do You Evaluate Alternative Channel Designs?*
• Channel Goals: Channel efficiency and effectiveness
– Expected sales and costs* value
– Control and required resources
– Flexibility
– Learning and Knowledge©McGraw-Hill Companies, Inc. 2002
30
Break-even Cost analysis: Company Sales Force (direct channel) and a Manufacturer’s
Sales Agency (indirect channel)
SalesCosts
Manufacturer’sSales Agency
CompanySales Force
Level of Sales
Se
Exhibit 3.3
©McGraw-Hill Companies, Inc. 2002
Sales volume
Sales Cost
Topic 5Three Approaches for Choosing Three Approaches for Choosing
a Channel Structurea Channel Structure
66
1.“Characteristics of Goods & Parallel Systems” Approach* (Table 6.2 on p. 207)
2.Transaction Cost Analysis Approach*3.Firm Capability-based Approach
“Characteristics of Goods & Parallel Systems” Approach*
66
Characteristic Red Goods Orange Goods Yellow Goods
Replacement
Rate
High Medium Low
Gross Margin Low Medium High
Adjustment Low Medium High
Time of Consumption
Low Medium High
Searching Time Low Medium High
Ex) Yogurt Luxury Car
33
Transaction Cost Analysis (TCA)*• Focus: Acheiving Highest Economic Efficiency
• Costs occur whenever firms perform channel “functions”– Fixed and variable components.
• TCA states that firms should purse the most efficient channel arrangement based on cost avoidance.
– “Make” option = Direct channel
– “Buy” option = Indirect channel
34
The Continuum of Interfirm Exchange Format*
Hierarchy(Make)
Franchise Systems
BuyingGroups
Market Setting(Buy)
* My latest thought on continuum
35
Key Assumptions and Dimensions of TCA**
• Channel members negotiate, monitor, and enforce exchange aspects by considering:
• Two assumptions– Bounded rationality– Opportunism
• Three transaction dimensions– Uncertainty (Internal and External)– Specificity of assets/resources– Frequency of transactions
Ex) Fashion Apparel (e.g., Nicole Miller)
36
Choosing Internal versus External Transactions*
• Conditions for choosing “Make” (Internal = Using Your own salesforce or shop) over “Buy” (external = Using independent distributor):
– A high level of environmental uncertainty should exist in the transaction cost assessment.
– The assets involved should be highly specialized and unique to the exchange process.
– The transaction should occur frequently.
• Examples: Sherwin-Williams; Curtis Mathes
• Third Breed: Clan Mechanism; Partial Integration
Firm Capability-based ApproachFirm Capability-based Approach66
A firm’s own capability to perform a function
V
Internalize the function!
IF
Outside suppliers’ capability
38
Three Steps To Take for Selecting the Best Channel Design*
1. Analyze Channel Objectives and Product Characteristics:
2. Analyze Desired Channel (Service) Output Utilities:
3. Analyze Market Behaviors and Segments
©McGraw-Hill Companies, Inc. 2002
Topic 6
39
1. Analyzing Channel Objectives and Product Characteristics
• Channel Objectives• Product Characteristics
– Unit value: length
– Standardization: length, intensity
– Bulkiness: length
– Complexity: length, intensity
– Stage of Product Life Cycle: intensity, ownership
Implications for level, intensity, and ownership and function
©McGraw-Hill Companies, Inc. 2002
40
3. Analyzing Market Behaviors and Segments
• Current and potential buyer behaviors:
– Who is doing the buying?
• Where,when and how end users buy:
– Seasonal
– Shopping from home
• Knowledge of industry (and its language)
©McGraw-Hill Companies, Inc. 2002
41
2. Analyzing Desired Channel Output Utilities
• Lot size utility
• Convenience (time/spatial) utility
• Assortment/Variety Utility
• Service utility
©McGraw-Hill Companies, Inc. 2002
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