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PART 6 - DELIVERING VALUE. Chapter 15 - Designing and Managing Integrated Marketing Channels

Terms in this set (37)

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.

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.

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.

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.
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.
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).

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.
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.
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.