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PART 6 - DELIVERING VALUE. Chapter 15 - Designing and Managing Integrated Marketing Channels
Terms in this set (37)
Successful value creation needs successful value delivery. Holistic marketers are increasingly taking a value network view of their businesses. Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final consumers. Companies are looking at their suppliers' suppliers upstream and at their distributors' customers downstream. They are looking at customer segments and considering a wide range of new and different means to sell, distribute, and service their offerings.
Companies today must build and manage a continuously evolving and increasingly complex channel system and value network. In this chapter, we consider strategic and tactical issues with integrating marketing channels and developing value networks. We will examine marketing channel issues from the perspective of retailers, wholesalers, and physical distribution agencies in Chapter 16.
In This Chapter, We Will Address the Following Questions
1. What is a marketing channel system and value network?
2. What work do marketing channels perform?
3. How should channels be designed?
4. What decisions do companies face in managing their channels?
5. How should companies integrate channels and manage channel conflict?
6. What are the key issues with e-commerce and m-commerce?
MARKETING CHANNELS AND VALUE NETWORKS
These intermediaries constitute a marketing channel (also called a trade channel or distribution channel).
Marketing Channels - are sets of interdependent organisations participating in the process of making a product or service available for use or consumption. They are the set of pathways a product or service follows after production, culminating in purchase and consumption by the final end user.
Merchants - buy, take title to, and resell the merchandise.
Agents - search for customers and may negotiate on the producer's behalf but do not take title to the goods.
Facilitators - assist in the distribution process but neither take title to goods nor negotiate purchases or sales.
The Importance of Channels
Marketing Channel System - is the particular set of marketing channels a firm employs, and decisions about it are among the most critical ones management faces.
In managing its intermediaries,the firm must decide how much effort to devote to push versus pull marketing.
Push Strategy - uses the manufacturer's sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end user.
Pull Strategy - the manufacturer uses advertising, promotion, and other forms of communication to persuade consumers to demand the product from intermediaries, thus inducing the intermediaries to order it.
Hybrid Channels and Multi-channel Marketing
Hybrid Channels or Multi-Channel Marketing - occurs when a single firm uses two or more marketing channels to reach customer segments.
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.
Customers expect channel integration,which allows them to:
- Order a product online and pick it up at a convenient retail location
- Return an online-order product to a nearby store of the retailer
- Receive discounts and promotional offers based on total online and offline purchases
The company should first think of the target market, however, and then design the supply chain backward from that point - Demand Chain Planning.
Value Network - a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings. A value network includes a firm's suppliers and its suppliers'suppliers, and its immediate customers and their end customers.
THE ROLE OF MARKETING CHANNELS
Through their contacts, experience, specialisation, and scale of operation, intermediaries make goods widely available and accessible to target markets, usually offering the firm more effectiveness and efficiency than it can achieve on its own.
Channel Functions and Flows
Some of these functions (storage and movement, title, and communications) constitute a forward flow of activity from the company to the customer; other functions (ordering and payment) constitute a backward flow from customers to the company. Still others (information, negotiation, finance, and risk taking) occur in both directions.
All channel functions have three things in common: They use up scarce resources; they can often be performed better through specialisation; and they can be shifted among channel members.
Zero-Level Channel - also called a direct marketing channel, consists of a manufacturer selling directly to the final customer.
One-Level Channel - contains one selling intermediary, such as a retailer.
Two-Level Channel - contains two intermediaries. In consumer markets, these are typically a wholesaler and a retailer.
Three-Level Channel - contains three intermediaries. In the meatpacking industry, wholesalers sell to jobbers, essentially small-scale wholesalers, who sell to small retailers.
Channels normally describe a forward movement of products from source to user, but reverse-flow channels are also important (1) to reuse products or containers (such as refillable chemical-carrying drums), (2) to refurbish products for resale (such as circuit boards or computers), (3) to recycle products (such as paper), and (4) to dispose of products and packaging.
Service Sector Channels
To design a marketing channel system, marketers analyse customer needs and wants, establish channel objectives and constraints, and identify and evaluate major channel alternatives.
Analysing Customer Needs and Wants
Consumers may choose the channels they prefer based on price, product assortment, and convenience, as well as their own shopping goals (economic, social, or experiential). As with products, segmentation exists, and marketers must be aware that different consumers have different needs during the purchase process.
Channels produce five service outputs:
1. Lot Size - the number of units the channel permits a typical customer to purchase on one occasion.
2. Waiting and Delivery Time - the average time customers wait for receipts of goods.
3. Spatial Convenience - the degree to which the marketing channel makes it easy for customers to purchase the product.
4. Product Variety - the assortment provided by the marketing channel.
5. Service Backup - add-on services (credit, delivery, installation, repairs) provided by the channel.
Providing greater service outputs also means increasing channel costs and raising prices.
Establishing Objectives and Constraints
Marketers should state their channel objectives in terms of service output levels and associated cost and support levels.
Identifying Major Channel Alternatives
Each channel—from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet—has unique strengths and weaknesses. Channel alternatives differ in three ways: the types of intermediaries, the number needed, and the terms and responsibilities of each. Let's look at these factors.
TYPES OF INTERMEDIARIES
Companies should search for innovative marketing channels. Sometimes a company chooses a new or unconventional channel because of the difficulty, cost, or ineffectiveness of working with the dominant channel. One advantage is often reduced competition, at least at first.
NUMBER OF INTERMEDIARIES
Three strategies based on the number of intermediaries are exclusive distribution, selective distribution, and intensive distribution.
Exclusive Distribution - means severely limiting the number of intermediaries. It's appropriate when the producer wants to maintain control over the service level and outputs offered by the resellers, and it often includes exclusive dealing arrangements.
Selective Distribution - relies on only some of the intermediaries willing to carry a particular product. Whether established or new, the company does not need to worry about having too many outlets; it can gain adequate market coverage with more control and less cost than intensive distribution.
Intensive Distribution - places the goods or services in as many outlets as possible. This strategy serves well for products consumers buy frequently or in a variety of locations.
TERMS AND RESPONSIBILITIES OF CHANNEL MEMBERS
The main elements in the "trade-relations mix"are price policies, conditions of sale, territorial rights, and specific services to be performed by each party.
- Price Policy - calls for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as equitable and sufficient.
- Conditions of Sale - refers to payment terms and producer guarantees.
- Distributors' Territorial Rights - define the distributors' territories and the terms under which the producer will enfranchise other distributors.
- Mutual Service and Responsibilities - must be carefully spelled out, especially in franchised and exclusive-agency channels.
Evaluating Major Channel Alternatives
Each channel alternative needs to be evaluated against economic, control, and adaptive criteria.
Each channel alternative will produce a different level of sales and costs. Firms will try to align customers and channels to maximise demand at the lowest overall cost. Clearly, sellers try to replace high-cost channels with low-cost channels as long as the value added per sale is sufficient.
The first step is to estimate how many sales each alternative will likely generate. The next step is to estimate the costs of selling different volumes through each channel. The final step is comparing sales and costs.
CONTROL AND ADAPTIVE CRITERIA
Using a sales agency can pose a control problem. The producer needs channel structures and policies that provide high adaptability.
After a company has chosen a channel system,it must select, train, motivate,and evaluate individual intermediaries for each channel. It must also modify channel design and arrangements over time. As the company grows, it can also consider channel expansion into international markets.
Selecting Channel Members
To facilitate channel member selection, producers should determine what characteristics distinguish the better intermediaries—number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation.
Training and Motivating Channel members
Carefully implemented training, market research, and other capability-building programs can motivate and improve intermediaries' performance. The company must constantly communicate that intermediaries are crucial partners in a joint effort to satisfy end users of the product.
Channel power is the ability to alter channel members' behaviour so they take actions they would not have taken otherwise.
Manufacturers can draw on the following types of power to elicit cooperation:
- Coercive Power. A manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate.This power can be effective,but its exercise produces resentment and can lead the intermediaries to organise. countervailing power.
- Reward Power. The manufacturer offers intermediaries an extra benefit for performing specific acts or functions.Reward power typically produces better results than coercive power,but intermediaries may come to expect a reward every time the manufacturer wants a certain behaviour to occur.
- Legitimate Power. The manufacturer requests a behaviour that is warranted under the contract.As long as the intermediaries view the manufacturer as a legitimate leader,legitimate power works.
- Expert Power. The manufacturer has special knowledge the intermediaries value. Once the intermediaries acquire this expertise, however, expert power weakens. The manufacturer must continue to develop new expertise so intermediaries will want to continue cooperating.
- Referent Power. The manufacturer is so highly respected that intermediaries are proud to be associated with it.
Coercive and reward power are objectively observable; legitimate, expert, and referent power are more subjective and depend on the ability and willingness of parties to recognise them.
More sophisticated companies try to forge a long-term partnership with distributors. To streamline the supply chain and cut costs,many manufacturers and retailers have adopted efficient consumer response (ECR) practices to organise their relationships in three areas: (1) demand side management or collaborative practices to stimulate consumer demand by promoting joint marketing and sales activities, (2) supply side management or collaborative practices to optimise supply (with a focus on joint logistics and supply chain activities),and (3) enablers and integrators, or collaborative information technology and process improvement tools to support joint activities that reduce operational problems,allow greater standardisation, and so on.
Evaluating Channel Members
Producers must periodically evaluate intermediaries' performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs.
Modifying Channel Design and Arrangements
No channel strategy remains effective over the whole product life cycle. In competitive markets with low entry barriers, the optimal channel structure will inevitably change over time.
In short, the channel system evolves as a function of local opportunities and conditions, emerging threats and opportunities,company resources and capabilities, and other factors.
Channel Modification Decisions
A producer must periodically review and modify its channel design and arrangements. The distribution channel may not work as planned, consumer buying patterns change, the market expands, new competition arises ,innovative distribution channels emerge, and the product moves into later stages in the product life cycle.
Global Channel Considerations
International markets pose distinct challenges, including variations in customers' shopping habits, but opportunities at the same time. In some cases, master franchisees pay a significant fee to acquire a territory or country where they operate as a "mini-franchiser" in their own right. More knowledgeable about local laws, customs, and consumer needs than foreign companies, they sell and oversee franchises and collect royalties.
The first step in global channel planning, as is often the case in marketing, is to get close to customers.
CHANNEL INTEGRATION AND SYSTEMS
Distribution channels don't stand still. We'll look at the recent growth of vertical, horizontal, and multichannel marketing systems; the next section examines how these systems cooperate, conflict, and compete.
Vertical Marketing Systems
Conventional Marketing Channel - consists of an independent producer, wholesaler(s), and retailer(s). Each is a separate business seeking to maximise its own profits, even if this goal reduces profit for the system as a whole. No channel member has complete or substantial control over other members.
Vertical Marketing System (VMS) - by contrast, includes the producer, wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, owns or franchises the others or has so much power that they all cooperate. There are three types: corporate, administered, and contractual:
CORPORATE VMS - combines successive stages of production and distribution under single ownership.
ADMINISTRATED VMS - coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of dominant brands can secure strong trade cooperation and support from resellers. The most advanced supply-distributor arrangement for administered VMSs relies on distribution programming, which builds a planned, professionally managed,vertical marketing system that meets the needs of both manufacturer and distributors.
CONTRACTUAL VMS - consists of independent firms at different levels of production and distribution, integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Sometimes thought of as "value-adding partnerships" (VAPs), contractual VMSs come in three types:
1. Wholesaler-Sponsored Voluntary Chains - of independent retailers to help standardise their selling practices and achieve buying economies in competing with large chain organisations.
2. Retailer Cooperatives - Retailers take the initiative and organise a new business entity to carry on wholesaling and possibly some production. Members concentrate their purchases through the retailer co-op and plan their advertising jointly. Profits pass back to members in proportion to their purchases.
3. Franchise Organisations - A channel member called a franchiser might link several successive stages in the production-distribution process.
The traditional system is the Manufacturer-Sponsored Retailer Franchise.
Another system is the Manufacturer-Sponsored Wholesaler Franchise.
A newer system is the Service-Firm-Sponsored Retailer Franchise, organised by a service firm to bring its service efficiently to consumers.
In a dual distribution system, firms use both vertical integration (the franchiser actually owns and runs the units) and market governance (the franchiser licenses the units to other franchisees).
THE NEW COMPETITION IN RETAILING
Many independent retailers that have not joined VMSs have developed speciality stores serving special market segments. The result is a polarisation in retailing between large vertical marketing organisations and independent specialty stores, which creates a problem for manufacturers.
Horizontal Marketing Systems
Horizontal Marketing System - in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies might work together on a temporary or permanent basis or create a joint venture company.
Integrating Multichannel Marketing Systems
Most companies today have adopted multichannel marketing.
Integrated Marketing Channel System - is one in which the strategies and tactics of selling through one channel reflect the strategies and tactics of selling through one or more other channels. Adding more channels gives companies three important benefits.
(1) increased market coverage.
(2) lower channel cost
(3) more customised selling
There is a trade-off, however.New channels typically introduce conflict and problems with control and cooperation. Two or more may end up competing for the same customers.
CONFLICT, COOPERATION, AND COMPETITION
No matter how well channels are designed and managed,there will be some conflict,if only because the interests of independent business entities do not always coincide.
Channel Conflict - is generated when one channel member's actions prevent another channel from achieving its goal.
Channel Coordination - occurs when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals.
Here we examine three questions:What types of conflict arise in channels? What causes conflict? What can marketers do to resolve it?
Types of Conflict and Competition
Yet horizontal, vertical, and multi-channel conflict can occur.
- Horizontal Channel Conflict - occurs between channel members at the same level.
- Vertical Channel Conflict - occurs between different levels of the channel.
- Multi-channel Conflict - exists when the manufacturer has established two or more channels that sell to the same market. It's likely to be especially intense when the members of one channel get a lower price (based on larger-volume purchases) or work with a lower margin.
Causes of Channel Conflict
Some causes of channel conflict are easy to resolve, others are not. Conflict may arise from:
- Goal incompatibility.
- Unclear roles and rights.
- Differences in perception.
- Intermediaries' dependence on the manufacturer
Managing Channel Conflict
Some channel conflict can be constructive and lead to better adaptation to a changing environment, but too much is dysfunctional. There are a number of mechanisms for effective conflict management
Strategic Justification - In some cases, a convincing strategic justification that they serve distinctive segments and do not compete as much as they might think can reduce potential for conflict among channel members. Developing special versions of products for different channel members is a clear way to demonstrate that distinctiveness.
Dual Compensation - Dual compensation pays existing channels for sales made through new channels.
Superordinate Goals - Channel members can come to an agreement on the fundamental or superordinate goal they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction.They usually do this when the channel faces an outside threat,such as a more efficient competing channel,an adverse piece of legislation,or a shift in consumer desires.
Employee Exchange - A useful step is to exchange persons between two or more channel levels. Thus participants can grow to appreciate each other's point of view.
Joint Memberships - Similarly, marketers can encourage joint memberships in trade associations. The associations can consider issues between food manufacturers and retailers and resolve them in an orderly way.
Co-option - Co-optation is an effort by one organisation to win the support of the leaders of another by including them in advisory councils, boards of directors, and the like. If the organisation treats invited leaders seriously and listens to their opinions, co-optation can reduce conflict, but the initiator may need to compromise its policies and plans to win outsiders'support.
Diplomacy, Mediation, and Arbitration - When conflict is chronic or acute, the parties may need to resort to stronger means. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation relies on a neutral third party skilled in conciliating the two parties' interests. In arbitration two parties agree to present their arguments to one or more arbitrators and accept their decision.
Legal Recourse - If nothing else proves effective, a channel partner may choose to file a lawsuit.
Dilution and Cannibalisation
Marketers must be careful not to dilute their brands through inappropriate channels, particularly luxury brands whose images often rest on exclusivity and personalised service.
Legal and Ethical Issues in Channel Relations
Here we briefly consider the legality of certain practices, including exclusive dealing, exclusive territories, tying agreements, and dealers' rights.
With exclusive distribution, only certain outlets are allowed to carry a seller's products.
Requiring that these dealers not handle competitors' products is called exclusive dealing.
Producers of a strong brand sometimes sell 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.law if they tend to lessen competition substantially.
E-COMMERCE MARKETING PRACTICES
E-commerce - uses a Web site to transact or facilitate the sale of products and services online. By saving the cost of retail floor space, staff, and inventory, online retailers can profitably sell low-volume products to niche markets.
Online retailers compete in three key aspects of a transaction: (1) customer interaction with the Web site, (2) delivery, and (3) ability to address problems when they occur.
We can distinguish between
Pure-Click Companies - those that have launched a Web site without any previous existence as a firm, and,
Brick-and-Click Companies - existing companies that have added an online site for information or e-commerce.
There are several kinds of pure-click companies: search engines, Internet service providers (ISPs), commerce sites, transaction sites, content sites, and enabler sites.
E-COMMERCE SUCCESS FACTORS
Companies must set up and operate their e-commerce Web sites carefully. Customer service is critical.
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 Web sites; (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.
Managing the online and offline channels has thus become a priority for many firms. Adding an e-commerce channel creates the possibility of a backlash from retailers, brokers, agents, and other intermediaries. There are at least three strategies for trying to gain acceptance from intermediaries. One, offer different brands or products on the Internet. Two, offer offline partners higher commissions to cushion the negative impact on sales. Three, take orders on the Web site but have retailers deliver and collect payment.
Many brick-and-click retailers are trying to give their customers more control over their shopping experiences by bringing Web technologies into the store
M-COMMERCE MARKETING PRACTICES
The existence of mobile channels and media can keep consumers connected and interacting with a brand throughout their day-to-day lives.
Mobile marketing and the fact that a company can potentially pinpoint a customer or employee's location with GPS technology also raises privacy issues. Like so many new technologies, location-based services have potential for good or harm and ultimately will warrant public scrutiny and regulation.
1. Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, a host of marketing intermediaries performing a variety of functions.
2. Marketing channel decisions are among the most critical decisions facing management. The company's chosen channel(s) profoundly affect all other marketing decisions.
3. Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by doing so. The most important functions performed by intermediaries are information, promotion, negotiation, ordering, financing, risk taking, physical possession, payment, and title.
4. Manufacturers have many alternatives for reaching a market. They can sell direct or use one-, two-, or threelevel channels. Deciding which type(s) of channel to use calls for analysing customer needs, establishing channel objectives, and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel.
5. Effective channel management calls for selecting intermediaries and training and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members.
6. Marketing channels are characterised by continuous and sometimes dramatic change. Three of the most important trends are the growth of vertical marketing systems, horizontal marketing systems, and multi-channel marketing systems.
7. All marketing channels have the potential for conflict and competition resulting from such sources as goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. There are a number of different approaches companies can take to try to manage conflict.
8. Channel arrangements are up to the company, but there are certain legal and ethical issues to be considered with regard to practices such as exclusive dealing or territories, tying agreements, and dealers' rights.
9. E-commerce has grown in importance as companies have adopted "brick-and-click" channel systems. Channel integration must recognise the distinctive strengths of online and offline selling and maximise their joint contributions.
10. An area of increasing importance is m-commerce and marketing through smart phones and PDAs.
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