DISTRIBUTION + MARKETING CHANNELS
Distribution Channel (or Marketing Channel) decisions are amongst the most
complex and challenging for the Company. One will usually confront a number of alternative ways
to reach the market which may vary from direct selling, to using one, two,
three or more intermediaries.
The entities making up the distribution channel are linked in different ways by
physical, title, payment, information and promotional flows. Channels do not
stay static but are characterized by continuous and often dramatic change. Two
of the most significant trends are the emergence of vertical and horizontal
marketing systems. Channels have a varied potential to yield sales and bear
costs. If a particular marketing channel is chosen, one must usually adhere to
it for a substantial period. The chosen channel will significantly affect and
be affected by the rest of the marketing mix.
Good channel design should begin with a clarification of channel objectives,
alternatives, and likely pay-offs. Objectives are conditioned by the particular
needs of customers, products, distributors, competitors and environment. The
alternatives are many because of the range of intermediaries, the different
intensities of market coverage, the various ways in which channel tasks can be
allocated to channel members, and the many likely trade-relations mixes. Each
alternative way to reach the market has to be specified and evaluated according
to economic, control, and adaptive criteria.
After the basic design of the channel is determined, one faces the task of
effective channel management and thereby to select particular distributor
solutions with which to work. One has to supplement the motivations provided to
channel members through the trade-relations mix by special incentives and
supervision. One has to periodically evaluate the performance of individual
channel members against their own past sales, other members' sales, and,
possibly, sales quotas.
Market environments are continually changing and need channel revisions;
channel members may be dropped or added, the channels in specific markets may
be modified, and sometimes the whole channel system may be redesigned.
Evaluating a proposed channel change may be made through incremental analysis
if only the particular unit or channel is affected; it may require a
system-level analysis if the change is likely to affect other units. In the
latter case, system simulation may be the most efficient way to determine the
channel's equilibrium. The greater the disequilibrium in a channel, the more
apparent it will be that channel modification would lead to increased profits.
Most firms do not sell their products and services directly to the final users
and the route to the market usually involves a host of marketing intermediaries
performing a variety of functions and bearing a variety of names. Some
middlemen - such as wholesalers or retailers - buy, take title to, and resell
the merchandise. Others - such as brokers, suppliers' representatives, and
sales agents - search for customers and may negotiate on behalf of the firm -
but do not take title to the goods.
Two aspects of channel decisions place them among the most critical marketing
decisions for management. The first reason is that the channels chosen for
products intimately affect every other marketing decision. The pricing
decisions depend upon whether one seeks a few franchised high-mark-up distributors
or mass distribution; advertising decisions are influenced by the degree of
co-operation from channel members; sales-force decisions depend upon whether it
sells directly to outlets or uses agents. This does not mean that one always
make channel decisions prior to other marketing decisions, but rather that they
exercise a powerful influence on the rest of the mix. The second reasons for
the significance of channel decisions is that they involve relatively long-term
commitments. If one decides on an exclusive distribution network one cannot
easily replace or modify this once conditions change. The mix of distribution
networks tend to impact on one another and are often in conflict. There is
always the danger of a powerful tendency toward the status quo in channel
arrangements and therefore one must choose its channels with an eye on
tomorrow.
INTERMEDIARIES
The industry seeks to bond together the array of marketing intermediaries that
best fulfill the objectives. This set of marketing intermediaries form the
marketing channel which within the company they also sometimes call the trade
channel or channel of distribution. Company managers tend to
paraphrase and echo the well quoted cliché our trading channel exists since
the terms of the agreements spanning the whole gap from us to our consumers are
concluded between operations assumed to possess the necessary marketing
capabilities - a comfortable sentiment. The relationship among the
participating operations in the company distribution channels are, more or
less, symbiotic in that they are usually dissimilar but work together for
mutual advantage. Co-operation is the dominant theme among the members of a
marketing channel, but at times conflict is no less pronounced, and company
managers must monitor channel efficiency.
CHANNEL LEVELS
The industry marketing channels can be characterized according to the number of
channel levels; this being each institutional level, beginning with the
company, that takes legal ownership or selling responsibility. This constitutes
a channel level. Clearly different product groups will encompass varying
numbers of channel level.
The shortest marketing channel consists of two levels, i.e. the company selling
directly to the End User. The ability of the industry to handle such direct
marketing operations must be explored.
A three-level channel contains one selling intermediary. In both consumer and
industrial consumable markets this intermediary is typically a sales outlet or
retailer; whereas in industrial & OEM markets the intermediary is often a
sales agent or broker.
A four-level channel contains two intermediaries. In consumer and industrial
consumable markets they are typically a wholesaler and a retailer; in
industrial and OEM markets they may be a sales agent and a wholesaler.
A five-level channel contains three intermediaries. An example is found in
markets where a jobber usually intervenes between the wholesalers and the
retailers. The jobber buys from wholesalers and sells to the smaller retailers,
who generally are not serviced by the large wholesalers.
From the company point of view the problem of control increases with the number
of levels, even though they may usually deal only with the adjacent level.
Whilst the performance and efficient of the Company distribution channels are
discussed in detail in other parts of the report it would be useful for the
reader to briefly seek to identify the distribution channel levels applicable
to the major operational units of the company and the major product groups. For
this purpose a quick checklist is given.
Target Company
|
Base Reference
|
PRODUCT
CHANNELS
|
|
|
Channels Direct
to End User
|
Channels Via
Sales-Force |
Channels Via
Sales Outlet
|
Channels Via Wholesaler
|
Channels Via
Jobber |
Performance Grid Definitions |
CHANNEL FLOWS
The various components of the Company’s supply
and distribution channels are inter-connected by formalized lines of
communications known as Channel Flows.
It will be seen that the Channel Flows encompass both down-stream flows, i.e.
between the industry and the End User, as well as up-stream flows, i.e. the
suppliers and sources of the industry.
These Channel Flows are as follows:-
1 - Physical flow
2 - Title flow
3 - Payment flow
4 - Information flow
5 - Promotional flow
The physical flow describes the actual movements of physical products from
input goods and services to products for the End User. This flow moves forwards
and downwards.
The title (or ownership) flow describes the actual passage of title (of
ownership) from one level in the distribution channel to another. This flow
moves forwards and downwards.
The payment flow shows the customer paying his bill to the supplier, and so on
up the distribution channel. This flow moves backwards and upwards.
The information flow describes how information is exchanged among the
institutions in the distribution channel. Information of many types flow both
ways.
The promotion flow describes directed flows of influence (advertising, personal
selling, sales promotion and publicity) from one party to next party in the
system. This flow is usually forwards and downwards.
Were all of these flows to be superimposed on one diagram, they would emphasize
the tremendous complexity of the Company’s distribution channels. This
complexity goes even further, once the company starts distinguishing among
different operational units and product lines and different final customers.
In order to diagrammatically illustrate the concept of Distribution Channel
Flows a number of flowcharts are provided and readers should attempt to
complete these as a simple exercise.
This exercise should be performed for each company operating unit and product
group.
INTERMEDIARIES
There are good reasons why the industry may be prepared to delegate some or all
of its marketing activities and its product distribution to intermediaries.
This surrender of corporate power usually means the relinquishment of some
control over how, where and to whom the products are sold, and furthermore the
industry may appear to be placing their destiny in the hands of others. Yet the
extent of the successful delegation of the distribution and marketing role may
demonstrate the management ability of the industry.
Since the industry are free, in principle and, in fact to market directly to
final customers, there must be certain advantages or necessities for using a
structured distribution channel.
Some of the major factors for the industry to consider are:
1. Does the company have the financial resources to embark on a new or extended
programme of direct marketing.
For example, General Motors' new
automobiles are marketed by over 18,000 independent dealers and whilst being one of the world's largest companies they would not
have the cash to buy out their dealers.
|
Direct marketing may require the company to itself become a distribution
channel for the complementary products of other suppliers in order to achieve
economies of scale and critical mass for distribution efficiency.
For example, a supplier of single confectionery
products would not find it practical to establish retail shops throughout
the country or to sell a single product confectionery door to door. The
supplier would have to tie confectionery in with the sale of many other
small products and would thus emerge in the retail business. It is much
easier for such a supplier to work through the existing and extensive
network of privately owned distribution institutions.
|
If the company does have the required capital to develop, extend or buy their own
distribution channels, management must consider that often one can earn a
greater return by increasing the levels of investment in other aspects of their
business. If a company is earning a 20 percent rate of return on its existing
operations and foresees only a 5 percent rate of return on investing in direct
marketing, it would not make sense to put money toward vertically integrating
its channels.
The industry use of distribution channels largely depends on their superior
efficiency in the performance of basic marketing tasks and functions. Marketing
intermediaries, through their experience, their specialization, their contacts,
and their scale, may offer the industry more than they might usually achieve on
their own.
PHYSICAL PRODUCT FLOWS
0:
|
1:
|
2:
|
3:
|
4:
|
5:
|
Supplier
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Jobber
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Wholesaler
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Retailer
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
End User
|
|
|
|
|
|
_______
|
The physical flow describes the actual movements of physical products from
input goods and services to products for the End User. This flow moves forwards
and downwards.
OWNERSHIP FLOWS
0:
|
1:
|
2:
|
3:
|
4:
|
5:
|
Supplier
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Jobber
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Wholesaler
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Retailer
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
End User
|
|
|
|
|
|
_______
|
The title (or ownership) flow describes the actual passage of title (of ownership)
from one level in the distribution channel to another. This flow moves forwards
and downwards.
PAYMENT FLOWS
5: |
Supplier
|
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
4: |
|
Company
|
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
3: |
|
|
Jobber
|
|
|
|
|
|
|
Sub-Channel
|
|
|
|
2: |
|
|
|
Wholesaler
|
|
|
|
|
|
|
Sub-Channel
|
|
|
1: |
|
|
|
|
Retailer
|
|
|
|
|
|
|
Sub-Channel
|
|
0: |
|
|
|
|
|
End User
|
|
|
|
|
|
|
_______
|
The payment flow shows the customer paying his bill to the supplier, and so on
up the distribution channel. This flow moves backwards and upwards.
INFORMATION FLOWS
5: |
Supplier
|
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
4: |
|
Company
|
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
3: |
|
|
Jobber
|
|
|
|
|
|
|
Sub-Channel
|
|
|
|
2: |
|
|
|
Wholesaler
|
|
|
|
|
|
|
Sub-Channel
|
|
|
1: |
|
|
|
|
Retailer
|
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
|
End User
|
0: |
|
|
|
|
|
_______
|
The information flow describes how information is exchanged among the
institutions in the distribution channel. Information of many types flows both
ways.
PROMOTIONAL FLOWS
0:
|
1:
|
2:
|
3:
|
4:
|
5:
|
Supplier
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Jobber
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Wholesaler
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
Retailer
|
|
|
|
|
|
Sub-Channel
|
|
|
|
|
|
|
End User
|
|
|
|
|
|
_______
|
The promotion flow describes directed flows of influence (advertising, personal
selling, sales promotion and publicity) from one party to next party in the system.
This flow is usually forwards and downwards.
The chief functions of marketing intermediaries are to assemble a few lines of
several suppliers, or several lines of a few suppliers and aggregate them into
a range of potential interest to buyers; - thereby achieving "the
goal of marketing which is the matching of segments of supply and demand".
This matching of segments of supply and demand requires the industry to carry
out of a number of specific marketing functions.
-
Contact - the searching out of buyers and sellers
-
Merchandising - the fitting of the goods to
market requirements
-
Pricing - the selection of a price high enough to
make supply possible and low enough to induce users to accept the products
-
Propaganda - the conditioning of the buyers or
of the sellers to a favorable attitude toward the product of its sponsor
-
Physical Handling - the transporting
and storing of the goods and/or the physical handling of customers
For the company manager it is not simply a question of whether these functions
must be performed in order to bridge the gap between themselves and their
customer - clearly it must be - but rather the question of who is to perform
the functions. Are these functions currently being performed to maximum effect
and how can performance be improved?
All of the functions have two things in common:
-
They use up scarce resources.
-
They can often be performed better through specialization.
If the company is convinced that it can perform these functions, then the
company's costs go up and thus prices have to be higher.
When some of these tasks are delegated to intermediaries, the company costs and
prices are lower, but the intermediary must add a margin to cover the use of
their own scarce resources.
The issue of who should perform various channel tasks is largely one of
relative efficiency and effectiveness. To the extent that specialist
intermediaries achieve economies through their scale of operation and their
know-how, the company may gain profitability by transferring some or all of the
channel functions to their charge.
A major point for the industry to keep in mind is that marketing functions are
more basic, than the institutions that, at any given time, appear to perform
them. Changes in the number of channel levels and/or types of selling
intermediaries largely reflect the discovery of more efficient ways to combine
or separate the economic work that must be carried out if meaningful
assortments of products are to be presented to customers.
PRODUCT FUNCTION CHECKLIST
It would be useful at this point if the reader were to attempt to grade or
estimate the relative efficiency of the marketing functions of the various
operational and product groups of the industry.
The checklists given here can be used as a quick exercise.
Company Products |
Products & Services |
Significant Company Products Company Product / Brand Sector 1
Company Product / Brand Sector 2
Company Product / Brand Sector 3
Company Product / Brand Sector 4
Company Product / Brand Sector 5
Company Product / Brand Sector 6
Company Product / Brand Sector 7
Company Product / Brand Sector 8
Company Product / Brand Sector 9
Company Product / Brand Sector 10
Company Product / Brand Sector 11
Company Product / Brand Sector 12
Company Product / Brand Sector 13
Company Product / Brand Sector 14
Company Product / Brand Sector 15 |
|
Major Products Industry Product Sector 1
Industry Product Sector 2
Industry Product Sector 3
Industry Product Sector 4
Industry Product Sector 5
Industry Product Sector 6
Industry Product Sector 7
Industry Product Sector 8
Industry Product Sector 9
Industry Product Sector 10
Industry Product Sector 11
Industry Product Sector 12
Industry Product Sector 13
Industry Product Sector 14
Industry Product Sector 15 |
|
Target Company
|
Base Reference
|
PRODUCT
FUNCTION CHECKLIST
|
|
|
Contact |
Merchandising |
Pricing |
Propaganda |
Physical
Handling |
Performance Grid Definitions |
CHANNEL CHANGES
Distribution Channel components, like products, exhibit a life cycle. A
specific channel may emerge or be developed, enjoy steady or rapid growth,
reach a point of relative maturity, and finally move into a period of slow
decline. A major force behind the Distribution Channel life cycle is the
changing economics, which make new combinations of marketing functions suddenly
more efficient than previous ones.
All products and services have a point of sale, and whatever the term applied
to this point of sale, it is nevertheless the case that all companies are (in
some form or another) in the business of retailing their products and services.
Over the years totally new ideas and concepts of distribution channels have
appeared in many markets and this has reflected the general sophistication of
marketing methods which in turn mirror the deepening in the complexity of
products and services which need to be marketed.
The distribution revolution is thus a multi-faceted movement and is a process
of "creative destruction" where many of the changes in retail and
sales outlets, but by no means all of them, can be explained by the cycle of
retailing hypothesis.
-
According to this hypothesis, many new types of distribution channel
components first begin as low-status, low-margin, low-price operations. They
become effective competitors of more conventional outlets, which have grown
"fat and inefficient" over the years. Their success gradually leads
them to upgrade their facilities and offer additional services.
-
This increases their costs and forces price increases until they finally
resemble the conventional outlets that they displaced. They, in turn, become
vulnerable to still newer types of low-cost, low-margin operations.
This cyclical pattern explains the success and later troubles of many sales
outlets and points of distribution.
The industry must analyze and be aware of the point in the cycle at which each
of their distribution components have reached - and thereafter monitor any sign
of downturn.
DISTRIBUTION CHANNEL INVESTMENT EFFECT FORECASTS
This section analyses the effects of a Distribution Channel Improvement programme
and its inferred expenditure in terms of the industry's Financial and
Operational results.
Distribution Channel Investments can bring almost immediate results in terms of
turnover and profitability and in general terms the investment involves both
short-term tactical projects as well as medium-term expenditure on equipment
and capital projects.
The Financial and Operational Distribution Channel Investment Scenario Data
forecasts given make the following assumptions:-
1. Forecasts are based on all external factors:
a. Market Growth (Medium + Long Term)
b. Competitive Market Factors
c. Competitor + Industry Environment Factors
2. Forecasts assume ceteris paribus in terms of internal factors with
the exception of a Distribution Channel Improvement programme and its
expenditure which is assumed to increase by a rate equivalent to 5% greater
than the competitor average
3. Forecasts assume changes in Market Competitors. The forecast assumptions use
Competitor databases to forecast changes in competitive situations which will
affect the Company and includes the Competitor response (in Distribution
Channel Terms) to the scenario shown.
Distribution
Channel Improvement
VERTICAL CHANNEL
While individual channel forms undergo continuous and occasionally dramatic
change, a very significant development is occurring that cuts across many
markets and which is perceived in the activities of many of the competitors of
the company.
This development is the emergence of vertical marketing (channel) system and to
understand them one should first define traditional marketing channels.
Traditional channels are "highly fragmented networks in which loosely
aligned suppliers, wholesalers, and retailers have bargained with each other at
arm's length, negotiated aggressively over terms of sale, and otherwise behaved
autonomously".
By contrast:
Vertical marketing systems are "professionally managed and
centrally programmed networks, pre-engineered to achieve operating economies
and maximum market impact".
These systems offer effective competition to individualistic marketing systems
because they achieve impressive scale economies through their size, bargaining
power, and elimination of duplicated services. In fact, they have emerged in
many markets as the preferred mode of distribution and thus accounting for a
majority percentage of the available market.
Three types of vertical
marketing systems (VMS) can be distinguished.
1. Corporate system
A corporate vertical marketing system has as its distinguishing characteristic
the combining of successive stages of production and distribution under a
single ownership.
For example, Sears apparently obtains
40 percent of its supplies from manufacturing facilities in which it has an equity interest; whilst Holiday Inns had evolved a
self-supply network that includes a carpet mill, a
furniture
manufacturing plant, and numerous captive redistribution facilities.
|
In short many organizations have significant vertically integrated systems and
to describe them merely as "retailers", "manufacturers", or
"service operators" oversimplifies their operating complexities and
ignores the realities of the marketplace.
2. Administered system
An administrated vertical marketing system, by contrast, achieves coordination
of successive stages of product supply and distribution not through common
ownership, but through the size and power of one of the parties within the
system. Thus, suppliers of a dominant product or brand are able to secure
strong trade cooperation and support from resellers.
Many dominant companies are able to command unusual cooperation from their
resellers and retailers in connection with resources, displays, sales staff,
promotions, and price policies.
3. Contractual system
A contractual vertical marketing system consists of independent firms at
different levels of supply and distribution integrating their programmes on a
contractual basis to obtain greater economies of scale and/or sales impact than
they could alone.
Contractual VMSs have expanded amongst most of the competitors of companies in
recent years and constitute one of the most significant developments in the
industry. The degree of such systems in the industry must be investigated.
Three different types of contractual VMS can be distinguished and managers must
isolate which of its products are susceptible to each VMS.
a. |
The first is the wholesaler-sponsored
voluntary chain, which originated in the efforts of wholesalers to save the
independent retailers they served against the competition of large chain
organizations. The wholesaler develops a programme in which independent
retailers join with him either to standardize their name or practices or to
achieve buying economies that enable them to stand as a group against the
inroads of the chains. |
b. |
A second type of contractual VMS are retailer
co-operatives. Usually they arise through the efforts of a group of retailers
to defend themselves against the corporate chains. The retailers organize an
entity to carry on the wholesaling process and possibly a production process as
well. Members are expected to concentrate their purchases, and profits from the
wholesale operation are passed back to members in the form of patronage
refunds. Individual retailers may agree to identify as members of a group and
carry on cooperative advertising; in many cases, however, they do not, and only
use the cooperative facilities as an economical source of supply. |
c. |
A third type of contractual VMS is the franchise
organization. Here several successive stages in the supply-distribution process
are linked under an agreement with one entity of the system, which is
considered the franchiser. Franchising has been the fastest growing and most
interesting retailing development in recent years. Although the basic idea is
an old one, some forms of franchising are quite new. In fact, three different
forms can be distinguished.
|
i. |
The first form is the manufacturer-sponsored
retailer franchise system, exemplified in the automobile industry, where a car
manufacturer licenses dealers to sell its product, the dealers being
independent businessmen who are nevertheless obligated to meet various
conditions of sales and service. |
ii. |
The second form is the manufacturer-sponsored
wholesaler franchise system, which is found in the soft-drink industry. The
soft-drink manufacturer licenses bottlers (wholesalers) in various markets who
buy its concentrate and then carbonate, bottle, and sell it to retailers in
local markets.
|
iii. |
The third form is the service-firm
sponsored retailer franchise system. Here a service firm organizes a whole
system for bringing its service efficiently to consumers. Examples are readily
found in the car rental business, restaurant business, and motel business.
|
It is thus not surprising that durable and programmed networks of suppliers and
retailers are rapidly replacing the "opportunistic ad hoc linkages"
that have historically prevailed in many lines of trade.
To survive, some companies are joining, together in their own VMSs and some
then adopt a role of a specialist operator serving discrete segments of the
market that are not available or attractive to the mass merchandisers.
Furthermore there are instances where large companies have specifically entered
specialist markets, away from their mainstream activities, in order to capture
some specific part of the market.
Thus there is a growing polarization in many markets, with large vertical marketing
organizations on the one hand and specialty independent companies on the other.
This development causes distribution problems for suppliers of national brands
as well as high volume products.
The large scale suppliers usually utilize the traditional outlets and channels
of distribution which they cannot easily give up. At the same time, they must
eventually realign themselves with the high-growth mass- merchandising outlets.
When they do, they will probably have to accept poorer terms from these large
buying organization.
Vertical marketing systems can always decide to bypass large suppliers and set
up their own supply facilities. In general, the new competition in product
distribution is no longer between independents but rather between whole systems
of centrally programmed networks (corporate, administrative, and contractual)
competing against each other to achieve the best economies and customer
response.
HORIZONTAL CHANNELS
A significant development amongst the Company’s competitors is the readiness of
two or more companies to form alliances to jointly exploit an emerging
marketing opportunity. Individually some competitors may not be able to amass
the capital, know-how, supply or marketing facilities to venture alone; or they
prefer not to because of the high risk; or they foresee substantial synergy in
the proposed relationship.
These companies may set up temporary or permanent arrangements to work with
each other, or to create a third entity owned by the two parents. Such
developments in horizontal marketing systems have been described as symbiotic
marketing.
CHANNEL POSITION
The importance of vertical and horizontal marketing-channel systems underscores
the dynamic and changing nature of channels. Both the company and the
competitors tend to define their relation to the dominant channel type and
pricing policies, advertising, and sales-promotion practices.
There are five types of relationship of the company to the dominant channel and
if they seek to be members of the dominant channel who enjoy continuous access
to preferred sources of supply and high respect in the market they need to ask
themselves the following questions:
1. |
Are the company one of the Insiders
and do they have a vested interest in perpetuating the existing channel
arrangements and are they one of the main enforcers of the market norms? |
2. |
Are the company one of the Strivers.
Do they seek to become insiders but have not yet arrived because they have
discontinuous access to preferred sources of supply, which can disadvantage
them in periods of short supply. Do they adhere to the market norm because of
their desire to become insiders? |
3. |
Are the company a Complementor
in that they neither are, nor seek, to be part of the dominant channel. They
perform functions not normally performed by others in the channel, or serve
smaller segments of the market, or handle smaller quantities of merchandise. Do
they usually benefit from the present system and tend to respect the market
norm? |
4. |
Are the company one of the Transients,
who like the complementors, are outside of the dominant channel and do not seek
membership. Do they go in and out the market or move around as opportunities
arise, but are really members of another channel. Do they have short-run
expectations and little incentive to adhere to the market norm? |
5. |
Finally, are the company an Outside
innovator and are thus the real challengers and disrupters of the dominant
channels. Do they come with an entirely new system for carrying out the
marketing work of the channel; if successful, will they cause major structural
realignments? |
CHANNEL COMPETITION
The preceding discussion demonstrates and underlines that the company marketing
channels undergo a high degree of competition and conflict. Channel competition
for companies occurs between marketing components or entire marketing channels
systems that are trying to serve the same target market.
Channel conflict, on the other hand describes
the opposition of interests that exists between different levels making up the
same channel. Examples can be cited:
A company might threaten to drop distribution channel members who refuse to
comply with their ideas on service, pricing, advertising, and so on.
The distribution channel of a company might boycott their products because
they are marketing via other distribution channels who are heavily discounting.
One type of company distribution channel member may object to them
attempting to market via parallel markets.
Channel conflict may arise for a company because the members of the
distribution channel differ in their goals, roles, perceptions, and power.
A strong supplier may want their wholesalers to sell at low margin, grant
credit to retailers, maintain good inventories, provide customer information,
push his products aggressively, not carry competing brands, and pay promptly.
The wholesalers, on the other hand, may want a wider and deeper line from the
supplier, lower prices, extensive consumer advertising, exclusive distribution
rights, a liberal returns policy and ample credit terms. Each channel member
typically thinks he is in a "zero sum game", and hard feelings
develop when the strongest member uses his economic power to settle the issue.
An amount of channel conflict is healthy, the problem is not one of eliminating
it - but of managing it better.
The solution to channel conflict lies in two possible directions. The first is
the effort to develop super-ordinate goals for the system from which everyone
would gain . Super-ordinate goals would include trying to minimize the total
cost of moving the product through the system improving information flows
within the system, and co-operating to increase consumer acceptance of the
product. The second is to develop administrative mechanisms that increase
participation and trust such as dealer and distributor councils.
MARKETING EXPENDITURE EFFECT FORECASTS
This section analyses the effects of a moderate increase in Advertising and Marketing
expenditure in terms of the industry's Financial and Operational results.
Marketing Expenditure includes Sales & Selling costs, Distribution /
Warehousing / Handling / Processing costs, Advertising / Promotional costs,
After-sales costs and Total Marketing costs.
The Scenario assumes that the industry increases its Marketing spend by 5%
above that of the market and competitor average for the countries in which the
industry operates.
The Financial and Operational Data forecasts for the Marketing Expenditure
Scenario make the following assumptions:-
1. Forecasts are based on an interaction of all factors:
a. Market Growth (Medium + Long Term)
b. Competitive Market Factors
c. Competitor + Industry Environment Factors
2. Forecasts assume ceteris paribus in terms of internal factors with
the exception of Advertising and Marketing spend which is assumed to increase
by a rate equivalent to 5% greater than the market average.
3. Forecasts assume changes in Market Competitors. The forecast assumptions use
Competitor databases to forecast changes in competitive situations which will
affect the Company and includes the Competitor response (in Advertising &
Marketing Terms) to the scenario shown.
Marketing
Expenditure
CHANNEL DESIGN
In considering the distribution channel decision problems from the point of
view of the company one must realize that, whilst competitors in the marketing
system are growing in importance, it is easier to appreciate the major issues
in channel design and management by starting from the company vantage point and
looking toward the market.
In developing channels of distribution, the company has to compromise between
what is ideal and what is available. In the typical case, some new products may
start as a local or regional operation seeking sales in a limited market. Since
the operation or product line may have a limited budget, it usually utilizes
existing distribution channels.
If the new product is successful, it may branch out to new markets and again, a
company will tend to work through the existing intermediaries, although this
may mean using different types of marketing channels in different areas. In the
smaller markets, a company may deal directly with the point of sale; in the
larger markets, they may work only through other distribution channels.
CHANNEL OBJECTIVES
The starting point for the company in the effective planning of distribution
channels is a determination of which markets are to be reached by the company.
In practice, the choice of markets and choice of channels may be
interdependent. The company may discover that markets it would like to serve
cannot be served profitably with the available channels. Each product supplied
shapes specific channel objectives from major situational constraints stemming
from the customers, products, intermediaries, competitors, company policies,
and the environment.
1. Customer Characteristics
Channel design is greatly influenced by customer characteristics. When the
number of customers is large, a company will tend to use long channels with
many intermediaries on each level.
The importance of the number of buyers is modified somewhat by their degree of
geographical dispersion. It is less expensive for a company to sell directly to
a small number of customers who are concentrated in a few geographical centers
than to sell them if they are scattered over large number of locations. Even
number and geographical dispersion are further qualified by the purchasing
pattern of these buyers. Where the ultimate customers purchase small quantities
on frequent basis, lengthier marketing channels are desirable. The high cost of
filling small and frequent orders leads suppliers of such products to rely
chiefly on wholesale channels. At the same time, these same suppliers may also
bypass their wholesalers and sell direct to certain larger customers who place
larger and less frequent orders. The buyers' susceptibilities to different
selling methods also influence channel selection.
2. Product characteristics
Product characteristics also influence channel design. Repeat products require
more direct marketing because of the physical nature associated with delays and
repeated handling.
Products that have a low unit value usually require channel arrangements that
minimize the distance and the number of handlings in the movement from supplier
to ultimate customers. Non-standard products are usually sold directly by the
company salesforce because of the difficulty of finding distribution channels with
the requisite expertise. Products requiring after-sales services and/or
maintenance are usually are sold and maintained directly by the company or by
distribution channels with exclusive franchises. Products of high unit value
are often sold through a company salesforce rather than through independent
distribution channels.
Target Company
|
Base Reference
|
CHANNEL
CHARACTERISTICS
|
|
|
Customer
Strengths |
Product
Strengths |
Competitive
Strengths |
In-House
Strengths |
Environmental
Strengths |
Performance Grid Definitions |
3. Distribution Channel characteristics
Channel design must take into account the strengths and weaknesses of different
types of intermediaries in handling various tasks delegated by the company. In
general, the intermediaries used by the company differ in their aptitude for
performing such functions as transit, advertising, storage, and contact, as
well as in their requirements for credit, return privileges, training, and
frequency of supply. In all events the difference in the distribution channel
characteristics for each of the operating units and product groups of the
company will tend to be worthy of investigation and thereafter improvement.
4. Competitive characteristics
The channel design used by the company is influenced by the distribution
channels used by their competitors. In some, if not all, product and market
sectors the company want their products to compete in or near the same outlets
carrying the competitors' products. Thus in certain circumstances the company
will want their products to be sold adjacent to that of their competitors.
The marketing channels used by competitors sometimes define what the company
wants to avoid rather than imitate. In deciding not to compete with some
competitors for scarce merchandising and point of sale locations the company
must consider using new and innovative methods of distribution and customer
servicing.
5. Company characteristics
Company characteristics play an important role in the distribution channel
selection. The relative size of companies in relation to the competitors' size
determines the extent of its markets, the size of its larger accounts, and its
ability to secure the co-operation of intermediaries it elects to use. The
financial strength of a company sets limits on which marketing tasks it can
handle and which ones to delegate to intermediaries. If certain companies
operations are financially weak they will tend to employ commission methods of
distribution and try to enlist intermediaries able and willing to absorb some
of the inventory, transit, and customer-financing costs.
The company product mix influences its distribution channel patterns. The wider
the company's product mix, the greater the ability of the company to deal with
its customers directly. The greater the average depth of the company's product
mix, the more it is likely to favor exclusive or selective intermediaries. The
more consistent the company's product mix, the greater the homogeneity of its
marketing channels. The past experience of a company affects channel design as
well as present marketing policies.
A policy of speedy delivery and service to ultimate customers affects the
functions a company wants intermediaries to perform, the number of final-stage
outlets and stocking points, and the type of transportation system used.
A policy of heavy advertising will lead a company to seek intermediaries
willing to handle displays and join in co-operative advertising programmes.
6. Environmental characteristics
Company distribution channel design is further influenced by environmental
factors.
In markets where economic conditions are depressed, the company will want to
move their goods to market in the way that is least expensive for final
customers. This often means using shorter channels and dispensing with
unessential services that add to the final price of the goods.
Legal regulations and restrictions also affect channel design. The law has
sought to prevent channel arrangements that "may tend to substantially
lessen competition or tend to create a monopoly". The most sensitive areas
have to do with agreements by certain types of suppliers not to sell certain
types of outlets, attempts by suppliers to offer his line to distributors on
condition they do not carry competitive lines, attempts by suppliers to force
his full line through distributors, arbitrary action by suppliers in the
withdrawal or refusal to renew distribution franchises, and attempts to set up
territorial restrictions which substantially lessen competition.
CHANNEL ALTERNATIVES
Distinguishing the major channel alternatives
After specifying distribution channel objectives and constraints, the company
should proceed to distinguish the channel alternatives.
A distribution channel alternative for a company specifies four elements:
1. |
The basic types of
business intermediaries who will be involved in marketing and
facilitating the movement of company products to the market. |
2. |
The number of
intermediaries who will be used by the company at each stage of
distribution. |
3. |
The particular marketing
tasks delegated to each type of the participating intermediary. |
4. |
The terms and mutual
responsibilities of the company and their intermediaries. |
1. Types of intermediaries
A company should first distinguish the alternative intermediaries available to
carry on its channel work. Consider the following scenario:
If a firm developed a new product that had considerable appeal; where the
product solved a specific market need; and managers felt that the product would
have a market in specific customer categories in a variety of market sectors
the problem would be how to reach these diverse customers in an effective way.
The following channel alternatives would come out of company management
discussions:
i. |
Rely mainly on the present
salesforce and a heavy programme of direct-mail and advertising. |
ii. |
Expand the salesforce and
assign each salesman an area with contact to all user groups. |
iii. |
Rely mainly on several
intermediaries, each of whom specializes in a different market
sector. |
iv. |
Rely mainly on independent
distribution channels who would undertake a limited amount of
promotion and carry the product as part of their overall offerings.
|
In answering these questions company management might take the view that not
only do conventional distribution channel arrangements suggest themselves, but
so do more innovative possibilities. A progressive management would try as far
as possible to explore the innovation rather than the tradition.
In analyzing the effectiveness of company management, one needs to plot the
incidence of distribution channel innovation against the instances of reliance
on traditional channels. The long term future (and profitability) will be seen
as a function of innovation over tradition and the greater that ratio, the more
likely the long term growth of the industry.
2. Number of Intermediaries
The number of intermediaries to use at each stage of the distribution system is
influenced by the degree of market exposure sought by the industry.
Three degrees of market exposure can be distinguished.
i. |
Intensive distribution.
Certain
company products may require intensive distribution that is, the supply of that
product from as many outlets as possible. The dominant factor in the marketing
of these products is their ease of access, and purchase, by the end customer.
|
ii. |
Exclusive distribution.
With
certain products the company may deliberately limit the number of
intermediaries handling the products. The extreme form of this is exclusive
distribution, a policy of granting third party distributors exclusive rights to
distribute the company's products in their respective territories; it often
goes along with exclusive dealing, where the company requires the intermediary
not to carry competing products.
This scenario is frequently found at the retail level with respect to the
distribution of very competitive, high profile and saturation advertised
products which attract significant marketing costs.
The question might be asked as to why the company may wish to limit the market
exposure of certain products? Obviously, the company will wish this limiting of
exposure to be traded-off by other advantages. Through granting exclusive
distribution privileges, the company may hope to gain a more aggressive selling
effort and be able to exercise more direct controls over intermediaries'
policies on prices, promotion, credit, and various services. Exclusive
distribution also tends to enhance the prestige or image of the product and
allow higher mark-ups. |
iii. |
Selective distribution.
Between the two extreme policies of intensive and exclusive distribution stands
a whole range of intermediate arrangements that have been called selective
distribution.
Selective distribution involves the use of more than one but fewer than all of
the intermediaries who are willing to carry a particular product. It is mainly
used by some for established products with good reputations and/or by new
products seeking to get distributors by promising them selective distribution.
Companies do not have to dissipate their marketing resources and efforts over a
range of outlets, many of which would be marginal. They can develop a good
working understanding with the selected intermediaries and expect a better than
average selling effort. In general, selective distribution enables the firm to
gain adequate market coverage with more control and less cost than intensive
distribution. |
3. Specific marketing tasks of channel members
The company faces a certain set of tasks in taking their products to the target
customers. The role of intermediaries is not to increase the number of these tasks but to perform them more efficiently. Looking at a channel
as a sequence of tasks rather than a linkage of business entities makes it
immediately apparent that managers are confronted with a large number of
alternatives, even when there is little choice regarding the basic types of
intermediaries and the best degree of market exposure.
Assume that the following four tasks have to be performed:
i.
|
Transit: the work
of transporting the goods toward the target markets
|
ii.
|
Advertising: the
work of informing and influencing buyers through advertising media
|
iii.
|
Storage: the
logistics of handling and supplying the product
|
iv.
|
Keep Control and
Contact: the work of the control and contact of potential customers
|
Assume that there are three channel members - Company (C),
Wholesaler (W), and Retailer (R) - and each can perform one
or more of these tasks. Consider some possible patterns of task allocation to
the various members of the channel.
The first scenario is:
C |
|
W |
|
R |
|
|
|
|
|
TA _ _ |
|
T_S_ |
|
_A_K |
In this distribution channel scenario, managers limit their marketing work to
the supply of the products and to advertising the product. (An "_" means the absence of the corresponding task).
The products are held by the marketing intermediary W, who also takes
responsibility for further distribution. W is therefore a facilitating
intermediary rather than a full-service intermediary. The final intermediary R
is responsible for further advertising (perhaps on a co-operative basis with
the company) and the control and contact of the final customer.
A different marketing channel scenario is implied by the pattern:
C |
|
W |
|
R |
|
|
|
|
|
T_S_ |
|
_ _ _ _ |
|
_A_K |
Here the company undertakes to provide the product, handle and supply to order.
The W intermediary is eliminated, and the R intermediary assumes the complete selling
function. This is the marketing channel developed by for many directly marketed
products.
Company management's task is to identify the feasible alternatives and select
the one that promises the highest degree of effectiveness in serving customers
relative to competition.
4. Terms and responsibilities of channel members
In conceiving the tasks to be performed by different types of intermediaries in
the distribution channel, managers must also determine the mix of conditions
and responsibilities that must be established among the channel members to get
the tasks performed effectively and enthusiastically. The 'trade-relations
mix' is capable of many variations and introduces a still further dimension
of alternatives.
There are four main elements in the trade-relations mix:
i. pricing policies
ii. conditions of sale
iii. territorial rights
iv. specific
performance of each party
i. |
Price policy is one of the
major elements in the trade-relations mix.
Managers will usually establish an end user price and then will allow discounts
from it to various types of intermediate customers and possibly for various
quantities purchased. In developing their schedule of discounts, one must
proceed carefully.
Firstly, because different types of intermediate customers have strong feelings
about the discounts they and others are entitled to. For example, small
retailers who buy through wholesalers resent a producer who allows the large
retailers to buy direct at the wholesaler's discount; whereas the larger
retailers resent not being allowed better terms on the basis of their quantity
purchases. Thus the discount schedule is a potential source of channel
conflict. Secondly, legislation may forbid price discrimination between
different buyers of the same products where the discrimination may tend to
lessen competition, except where the price differences are proportional to bona
fide differences in the costs of selling to the different buyers. Therefore
companies must be able to justify the discounts they offer to different buyers.
|
ii. |
Conditions of sale are the
second element of the trade-relations mix.
The most important conditions relate to the payment terms and to the guarantees
or other assurances provided by the company. For example one might grant a
discount from the distributor's invoice price for early payment or conversely
impose an interest penalty for late payment.
The particular terms can play an important role in the costs incurred by the
company and influence the distributor's motivation, because they indicate the
extent to which the company will finance the distributor's business activities.
Managers may also extend certain guarantees to the distributor regarding price
increases. The offer of a guarantee against price variations may be necessary
to induce the distributors to promote more and sell larger volumes.
|
iii. |
Distributors' territorial
rights are a third element in the trade-relations mix.
A distributor wants to know where the company intends to enfranchise other distributors.
He also would like to receive full credit for all sales taking place in his
territory, whether or not they were stimulated through his own efforts. |
iv. |
Mutual services and
responsibilities are a fourth element of the trade-relations mix.
These are likely to be comprehensive and well defined in franchised - and
exclusive - agency channels where the relations between the company and certain
distributors are close. In contrast, where the company goes after more
intensive distribution, they may supply distributors only occasionally with
some promotional materials and some technical services and the distributor in
turn is less willing to furnish an accounting of his efforts, an analysis of
customer buying differences, or co-operation in distributing promotional
materials. |
Target Company
|
Base Reference
|
CHANNEL
ALTERNATIVES
|
|
|
Type of
Intermediaries |
Numbers of
Intermediaries
|
Marketing
Effectiveness of Channels
|
Trading Terms
of Channel Members
|
Responsibilities
of Channel Members
|
Performance Grid Definitions |
CHANNEL EVALUATION
The industry have obviously identified and are utilizing several major channel alternatives
for reaching the market, yet their problem now is to decide which of the
alternatives would satisfy best the long-run objectives of the firm. For this,
they weigh the alternatives against:
1. Economic Factors
2. Control Factors
3. Adaptive Factors
1. Economic criteria
Of the three, Economic Factors is the most important, since managers are not
pursuing Channel Control or Adaptability per se, but ultimately, are pursuing
profits.
Whilst Channel Control and Adaptability have implications for long-run profit,
yet the more outstanding a channel alternative seems from an economic point of
view, the less important seem its potentialities for conflict and rigidity.
The basic question the company must ask of each of their operating units and
product groups, is if it is economically better, i.e. more profitable, for the
company to use company owned routes to the market or to use third party routes?
Clearly, the answer might be that the most profitable route may be a mix of the
two.
To illustrate the economic analysis, a concrete and familiar pair of channel
alternatives can be examined with the following scenario. A company wish to
distribute their products in a new national market; the choice being between a
company salesforce or the use of a sales agency.
Assume that the company wishes to reach a large number of sales outlet
opportunities in the country. Suppose an adequate company salesforce would
require hiring and training ten salesmen who would operate out of a branch
office in the country. They would be given a good base pay along with the
opportunity for further earnings through a commission plan.
The exercise is to estimate the cost of this alternative - then estimate the
cost of the other alternative:
The other alternative would be to use an established firm of sales agents
(in the countries) who have developed extensive contacts within the markets,
through the other lines they carry. The agents have thirty salesmen in their
organization and would receive a fixed percentage of the sales price of each
unit sold.
Each alternative will produce a different level of sales and costs. The better
system is not the one producing the greater sales or the one producing the
lesser cost, but rather the one that produces the best profit.
2. Control criteria
The evaluation of the economics of the various routes to the market will
provide a rough guide to the probable economic superiority of one channel over
the other. The evaluation must now be broadened by a consideration of the
motivational, control and conflict aspects of the two channel alternatives.
The use of sales agents can give rise to a number of control problems. The
central fact is that the sales agent is an independent entity. He is primarily
interested in maximizing his own profits. This sometimes can lead to
sub-optimization from the company point of view. The sales agent is more
concerned with promoting the image of his organization than that of the
company. He often does not co-operate with the company sales agent in an
adjacent territory, although the co-operation may benefit the client. He
concentrates his calls on the customers who are most important to him in terms
of his total assortment of goods rather than on the customers who are most
important to the client. He may not take the time to master the technical
details concerning the company product or show care in using the promotional
material. Altogether, the use of sales agents comes at the price of creating
certain problems of control.
The control aspects of a channel are broader than suggested in reviewing the
sales agent example. Where the firm are considering a complex channel
alternative, the ensuing issues should be evaluated :
i. |
Vertical relations in the channel.
How will the various levels in
the channel interact? Here there are two opposing dangers. At one extreme, the
self-interests of two or more levels may be so diametrically opposed that they
are always in conflict at the expense of the company. At the other extreme, the
self-interest of two or more channel levels may be so alike that they collude
to force concessions from the company. |
ii. |
Horizontal relations in the channel.
How will the members located
at a particular level in the channel interact? At one extreme, their
self-interests may clash, as when territorial or business boundaries are not
clear. At the other extreme, they may form an association to gain power at the
expense of the company. |
iii. |
Inter-channel conflict. Will
the different marketing channels established by a producer be in too much
conflict ? For example, watch manufacturers have a difficult time pleasing both
small retailers and discount outlets. |
iv. |
Legal conflict. Will the channel
contain any questionable features that might involve the company in a legal
action? For example, should the company plan to set up exclusive distribution,
they should first determine its legal status in respect of the other
distributors. |
3. Adaptive criteria
Suppose a particular channel alternative appears superior from an economic point
of view and poses no particular problem of control. One other criterion should
be considered - that of the freedom of the company to adapt to changing
conditions.
Each channel alternative involves some duration of commitment and loss of
flexibility. If the company decides to use a sales agent they may have to offer
a ten-year contract; during this period, other means of selling might become
more efficient, but alas the company will not be free to drop the sales agent.
In general, the less certain the future seems to be, the less favorable are
channel alternatives involving long commitments.
A channel alternative involving a long commitment must appear to be greatly
superior on economic or control grounds in order to be considered.
Target Company
|
Base Reference
|
CHANNEL
EVALUATION
|
|
|
Channel Evaluation:
Direct to End User
|
Channel
Evaluation: Via Sales-Force |
Channel
Evaluation: Via Sales Outlet |
Channel
Evaluation: Via Wholesaler
|
Channel
Evaluation: Via Jobber
|
Performance Grid Definitions |
Target Company
|
Base Reference
|
PRODUCT
CHANNEL EVALUATION
|
|
|
Vertical
Relations |
Horizontal
Relations |
Inter-channel
Conflict |
Legal Conflict |
Motivation |
Performance Grid Definitions |
Target Company
|
Base Reference
|
PRODUCT
CHANNEL ADAPTABILITY
|
|
|
Probability of
Channel Change
|
Easy of Exit
from existing channels
|
Penalties in Exit
from existing channels |
Flexibility of
Existing Channels
|
Potential for
developing Existing Channels |
Performance Grid Definitions |
CHANNEL MANAGEMENT
After a company has evaluated and monitored its basic channel design,
individual intermediaries must be:
1. Selected
2. Motivated
3. Periodically evaluated
1. Selecting channel members
The firm will always find itself somewhere between two extreme
positions in respect of the recruitment of intermediaries for their proposed
channel operation.
Sometimes one will have no trouble finding specific businesses to join the
channel. Some product proposals attract more than enough potential distribution
members, either because of the prestige enjoyed by a firm or because the
specific product (or line) appears to be a good money-maker. In some cases the
promise of exclusive or selective distribution will influence a sufficient
number of intermediaries to join the channel. The main problem is one of the
selection. One must decide on what characteristics of intermediary prospects
provide the best indication of their competence. The other extreme position is
where one chooses a channel alternative for which they have to work hard to
line up the desired number of qualified intermediaries. For example, if a
firm cannot find the right type of distribution members, with the right
attributes, they may have to accept whatever intermediaries they can get -
although in the medium term they should start a recruitment effort among the
more suited potential distribution members.
In many instances one has the task of marketing products to intermediate
customers and this means one must study how potential distribution members make
their buying decisions; specifically, how much weight they give to gross
margin, planned advertising and promotion, guarantees, and so on.
Whether or not one finds it easy or difficult to recruit distribution channels
in various markets, one clearly must determine what characteristics distinguish
the better intermediaries from the poorer ones. Even where the aim of a company
is intensive distribution, they may not want a particular product associated
with weak or faltering distributors.
One needs to look at each operation and each product group and evaluate the
distribution members. One must ask basic questions, like, years in business,
growth record, solvency, co-cooperativeness and reputation. If the distributor
is a sales agent, one will also want to evaluate the number and character of
other lines the distributor carries, whether they are adequately staffed to
give sufficient attention and know-how to the new line, and the turnover record
of their salesforce. If the distributor has exclusive distribution, then one
will want to evaluate their location, future growth potential and type of
clientele.
2. Motivating channel members
Members of the distribution channels must be motivated to
do their best job. The factors and terms that led them to join the channel
provided some of the motivation, but these must be supplemented by continuous
supervision and encouragement from the company. The company must sell not only
through the distribution channels but also to them. The question of motivation
is a complex one, since there are grounds for both co-operation and conflict
between the company and their distributors. The job of stimulating channel
members to good performance must start with the psychology and behavioral
characteristics of the particular distributor.
Management may echo the typical criticism of the distributor, being, the
failure to stress a given product, the poor quality of the salesforce product
knowledge, the disuse of suppliers' advertising materials, the neglect of certain
customer (who may be prospects for individual items but not the assortment) and
even for the unrefined systems of record keeping, in which the company's
product designation may be lost. However, what are shortcomings from the point
of view of the company may be quite understandable from the distributor's point
of view. Four propositions to help understand the distributor's viewpoint:
i. |
The distributor is not a hired
link in a chain forged by the company, but rather an independent
market member which, after some experimentation, has settled upon a
method of operation, performing those functions he deems inescapable
in the light of his own objectives, forming policies for wherever he
have freedom to do so. |
ii. |
The distributor often acts
primarily as a purchasing agent for his customers, and only
secondarily as a selling agent for the company and they are thus
interested in selling any product which their customers desire to
purchase. |
iii. |
The distributor attempts to
weld all of his offerings into a family of items which he can sell
in combination, as a packaged assortment, to individual customers.
His selling efforts are directed primarily at obtaining orders for
the assortment, rather than for individual items. |
iv. |
Unless given incentive to do
so, the distributor will not maintain separate sales records by
product sold even if that information that could be used in product
development, pricing, packaging, or promotion-planning. Data may be
buried in non-standard records which are often purposely secreted
from suppliers. |
These propositions serve company managers as a provocative departure from
otherwise stereotyped thinking about the purpose and performance of their
distributors. The first step in motivating others is to see the situation from
their viewpoint.
One must steer a careful course between over-motivating and under-motivating
the distribution channel. Over-motivation occurs when the terms offered by the
company are more generous than they have to be to secure a particular level of
co-operation and effort. The result may be high sales for the company - but low
profits. Under-motivation occurs when the company's terms are too anaemic to
stimulate more than a token effort by distributors. The result is low sales and
low profits. The problem is to determine the optimal level and kind of
motivation to provide the trade.
The basic level of motivation is established by the original trade-relations
mix. If the distribution members are still under-motivated, then one has two
alternatives. One can improve the margins, extend better credit terms, or do
any one of a number of things that alter the trade-relations mix in favor of
the distributors. Or one can stimulate greater distributor effort by using any
of a host of familiar devices, ranging from nagging the distributors, pep
rallies, sales contests and increased advertising.
Some managers may find it easier to use the stick than the carrot to motivate
their distributors, notably if they enjoy having power. Perhaps the firm might
be tempted to discriminate against certain distributors by forcing sub-standard
products on them, or use disincentives or prejudicial discounts. These policies
can breed deep ill will in the distribution channels and will someday return to
haunt the firm.
3. Evaluating channel members
One must
periodically evaluate the performance of one's distribution channels. Where a
channel member's performance is seriously below standard, it is necessary to
determine the underlying causes and to consider the possible remedies. One may
have to tolerate unsatisfactory performance, if dropping or replacing the
distributor would lead to even worse results. Albeit if there are attractive
alternatives to the use of this distributor, then one should require the
distributor to reach a certain level of sales by a stated time or be dropped
from the channel.
Much grief can be avoided if standards of performance and sanctions are agreed
upon at the very beginning between the company and the channel members. The
areas posing the greatest need for explicit agreement concern, sales intensity
and coverage; average product handling levels; customer delivery; promotional
treatment; co-operation in company promotional and training programmes; and
distributor services owed to the customer.
One might issue periodic sales quotas to define current performance
expectations and/or specify the product lines quotas. In some cases these
quotas are treated only as guides; in others, they represent serious standards.
One may list the sales of various distributors and send the rankings out. This
device is intended to motivate distributors at the bottom of the list to do
better for the sake of self-respect (and continuing the relationship). Distributors
at the top to maintain their performance out of pride.
Yet a simple ranking of the distributors by level of sales is not necessarily
the best measure. Distributors face varying environments over which they have
different degrees of control; the importance of the company product line in
their assortments also varies. One useful measure is to compare each
distributor's sales performance against the preceding period. The average
percentage improvement (or decline) for the group is used as the norm. One can
also compare each distributor's performance against a quota based on an
analysis of the sales potential in his territory. After each sales period,
distributors are ranked according to the ratio of their actual sales, as
opposed to their sales potential. Investigatory and motivational effort can
then be focused on those distributors who have under-achieved.
Target Company
|
Base Reference
|
PRODUCT
CHANNEL MANAGEMENT
|
|
|
Channel
Selection Screening
|
Channel
Motivation Programmed
|
Channel
Evaluation & Rating
|
Channel
Monitoring procedure
|
Channel Troubleshooting
procedure
|
Performance Grid Definitions |
CHANNEL MODIFICATIONS
The industry must do more than design a good distribution channel system and set
it into motion. Every so often the system requires modification to meet new
conditions in the marketplace.
Often if a particular supplier has been marketing exclusively through
franchised dealers a relative loss in market share would make the company take
stock of several distributional developments that had taken place since their
original channel was designed. New scenarios in distribution channels may
include:
1. Developments in new forms, or evolving forms, of point of sale outlets.
2. Developments in the nature and structure of the various components of the
distribution channels.
3. Changes in the products and services offered by competitors which alter the
relative selling of the distribution channels.
4. Changes in the attitudes of some channel members in terms of their
requirements from suppliers.
5. Developments in the promotional methods and channels used by competitors and
their Distributors.
6. Changes in the nature and type of the end customer and
the reflection of this on the distributors.
These and other developments in the ever-changing distribution scene will lead
the company to undertake a major review of possible channel modifications.
Three different levels of channel change should be distinguished.
1. The change could involve adding or dropping individual channel members.
2. Adding or dropping particular market channels.
3. Developing a totally new way to sell products in all markets.
The decision to add or drop particular distributors usually requires a linear incremental
analysis. The economic question is: What would the company profits look like
without the specific distribution member?
The incremental analysis could be complex if the decision would have many
consequences on the rest of the system. A decision to grant another franchise
in a region or country will require taking into account not only that dealer's
probable sales, but the possible losses or gains in the sales of the other
dealers.
Sometimes the company might contemplate dropping not an isolated distributor
but all distributors who fail to bring their sales above a certain level within
a certain time period as it may cost the company more to service these
distributors than the marginal revenue they actually contribute.
If the issue were a matter of dropping a few of these weak distributors, then
an incremental analysis would probably indicate that company profits would
rise. Yet the decision to drop most of these distributors could have such large
repercussions on the system as a whole that an incremental analysis would not
suffice. Such a decision would raise the unit costs of products, since the
overhead would have to be spread over sales; some resources would be idle; some
business in the markets where the smaller distributors were cut out would go to
competitors; and other company distributors might be made insecure by the
decision. Nothing short of a detailed, total systems simulation would be
adequate for comprehending all the effects.
The industry may sometimes face the question of whether their distribution
channel for reaching a particular geographical area or customer type is still
optimal.
A break-even or rate-of-return analysis could be made of the present and
alternative systems.
The most difficult "channel change" decision involves the revision of
the overall system of distribution.
For example, a company may consider replacing independent dealers with
company-owned dealers; a firm may consider replacing local franchised
distribution with centralized distribution and direct sales.
These are decisions that can only be made at the highest level of the company,
decisions that not only change the channels but necessitate a revision of most
of the marketing-mix elements and policies to which the firm is accustomed.
Such decisions have so many ramifications that any quantitative modelling of
the problem can only be a first approximation.
In analyzing the desirability of changing a channel, the company will find that
the task is one of determining whether the distribution channel is in
equilibrium. A channel is in equilibrium when there is no structural or
functional change that would lead to increased profits.
A structural change is one involving the
addition or elimination of some intermediary level in the channel.
A functional change is one embracing the
re-allocation of channel tasks among the channel members.
A channel is ripe for change when it is in disequilibrium, i.e. when it
provides an opportunity for gain through a structural or functional
modification.
A simple example will convey the concept of channel disequilibrium.
Assume there is a channel of the
Company
Wholesaler
Retailer type
( C – W –
R )
|
|
Each channel member makes a set of decisions on
Price,
Advertising, and
Distribution
( P, A, D ) |
For simplicity, assume that these decisions mainly affect the succeeding stage.
Thus the company makes decisions ( P, A,
D ), which influence the
quantity (Q1) ordered by the wholesaler.
The producer calculates his net profits (Z1) by subtracting
his costs from his revenue from the wholesaler.
In the same fashion, each channel member makes an independent set of decisions
that influence his revenue and cost and bring about a particular net profits.
Looking at the channel as a whole, a set of independent decisions is made
[( P, A, D )1,
( P, A, D )2,
( P, A, D )3]
that results in some total channel profit (Z1+Z2+Z3).
The concept of channel disequilibrium can now be defined precisely.
The channel is in disequilibrium if there exists an alternative set of
decisions [( P, A, D )1,
( P, A, D )2,
( P, A, D )3]
that would result in a different total channel profit (Z1+Z2+Z3)
that is greater than (Z1+Z2+Z3).
If this is the case, the channel presents an opportunity for increased profit.
But the alternative decisions are unlikely to be made as long as the channel
members make their decisions independently.
The greater the difference between (Z1+Z2+Z3)
and (Z1+Z2+Z3), the greater will
be the incentive of the channel members to pursue joint planning or for some
channel member to absorb one or more of the others to achieve the extra profits
from integrated decision making.
HISTORIC FINANCIAL INDUSTRY DATA
HISTORIC FINANCIAL INDUSTRY DATA
Financial Definitions
DISTRIBUTION + MARKETING CHANNELS FINANCIAL SCENARIOS
DISTRIBUTION + MARKETING CHANNELS FINANCIAL SCENARIOS FORECASTS
The DISTRIBUTION + MARKETING CHANNELS FINANCIAL SCENARIOS BALANCE SHEET
FORECASTS section gives a series of Forecasts for the Company and the industry
using a number of assumptions relating to the distribution decisions available
to the management of the Company.
The Balance sheet forecast given shows the effects of distribution improvements
which Financial Management is likely to recommend:
DISTRIBUTION + MARKETING CHANNELS FINANCIAL SCENARIOS
-
Base Forecast : Median Market Scenario
-
Distribution & Product Delivery Cost Objectives
-
Customer / Order Processing Systems Investment
-
Systems Investment
-
Customer Handling Improvements
Managers in the Company will, in both the short-term and the long-term, have
vital decisions to make regarding the distribution improvements, margins and
profitability and these decisions will need to be evaluated in light of the
customers, markets, competitors, products, industry and internal factors. The
scenarios given isolate a number of the most important factors and provide
balance sheet forecasts for each of the scenarios.
The data provides a short and medium term forecast covering the next 6 years
for each of the Forecast Financial and Operational items. The Financial and
Operational Data sections show each of the items listed below in terms of
forecast data and covers a period of the next 6 years.
|