Download Chapter 10

Chapter 10
Marketing Channels and Supply Chain Management
Previewing the Concepts: Chapter Objectives
1.
2.
3.
4.
5.
Explain why companies use distribution channels and discuss the functions these
channels perform.
Discuss how channel members interact and how they organize to perform the
work of the channel.
Identify the major channel alternatives open to a company.
Explain how companies select, motivate, and evaluate channel members.
Discuss the nature and importance of marketing logistics and integrated supply
chain management.
JUST THE BASICS
Chapter Overview
This chapter covers the important topic of supply chain management. Supply chains
consist of both upstream and downstream partners, including suppliers, intermediaries,
and even intermediary customers. The term value delivery network expands on the
limited nature of “supply chain.” It consists of the company, suppliers, distributors, and
ultimately customers who “partner” with each other to improve the performance of the
entire system.
The chapter focuses on marketing channels—the downstream side of the value delivery
network. A company’s channel decisions directly affect every other marketing decision.
And because distribution channel decisions often involve long-term commitments to
other firms, management must define its channels carefully, with an eye on tomorrow’s
likely selling environment as well as today’s.
Channel members add value by bridging the major time, place, and possession gaps that
separate goods and services from those who would use them. Members of the marketing
channel perform many key functions, such as gathering and distributing marketing
information; promoting products; contacting prospective buyers; matching supply with
demand; negotiating final prices; and performing the physical distribution of the goods,
financing large purchases, and taking the risk of selling the product.
For channels to
conflict must be
leader; vertical
leadership. The
administered.
work properly, each channel member’s role must be specified and
managed. Conventional distribution systems typically lacked a strong
marketing systems (VMS) have evolved to provide that channel
three major types of VMSs include corporate, contractual, and
226
In designing marketing channels, managers must analyze customer needs, set channel
objectives, identify major channel alternatives, and then evaluate those alternatives. In
designing international channels, marketers will face additional complexities. Each
country has its own unique distribution system that has evolved over time and changes
very slowly.
Marketing logistics, also called physical distribution, involves planning, implementing
and controlling the physical flow of goods, services, and other related information from
points of origin to points of consumption. It involves getting the right product to the right
customer in the right place at the right time. Marketing logistics addresses not only
outbound distribution, but also inbound and reverse distribution. The major logistics
functions include warehousing, inventory management, and transportation.
Chapter Outline
1.
Introduction
a.
Caterpillar believes its dominance over seven decades in the market for
heavy construction and mining equipment results from its unparalleled
distribution and customer support system.
b.
Caterpillar sells more than 300 products in nearly 200 countries,
generating sales of more than $30 billion annually. It has 30% of the
worldwide construction-equipment business, more than double that of
number two Komatsu.
c.
Competitors often bypass their dealers and sell directly to big customers to
cut costs or make more profits for themselves, but Caterpillar wouldn’t
think of going around its dealers. Caterpillar’s superb distribution system
serves as a major source of competitive advantage. The system is built on
a firm base of mutual trust and shared dreams.
d.
Most firms cannot bring value to customers by themselves. Instead, they
must work closely with other firms in a larger value delivery network.
Use Chapter Objective 1 here.
2.
Supply Chains and the Value Delivery Network
a.
The supply chain consists of “upstream” and “downstream” partners,
including suppliers, intermediaries, and even intermediary customers.
1.
Upstream from the manufacturer or service provider is the set of
firms that supply the raw materials, components, parts,
information, finances, and expertise needed to create a product or
service.
2.
Marketers have traditionally focused on the downstream side of the
supply chain, which are the marketing channels or distribution
channels that look forward toward the customer.
227
Use Key Term Marketing Channel (or Distribution Channel) here.
b.
It is the unique design of each company’s supply chain that enables it to
deliver superior value to customers.
1.
The term supply chain may be too limited—it takes a make-andsell view of the business.
2.
A better term would be demand chain because it suggests a senseand-respond view of the market. Under this view, planning starts
with the needs of the target customers, to which the company
responds by organizing resources with the goal of creating
customer value.
3.
Even this might be too limiting, however. A value delivery network
is made up of the company, suppliers, distributors, and ultimately
customers who partner with each other to improve the performance
of the entire system.
Use Key Term Value Delivery Network here.
c.
d.
3.
This chapter focuses on marketing channels—on the downstream side of
the value delivery network.
There are four major questions concerning marketing channels:
1.
What is the nature of marketing channels and why are they
important?
2.
How do channel firms interact and organize to do the work of the
channel?
3.
What problems do companies face in designing and managing their
channels?
4.
What role do physical distribution and supply chain management
play in attracting and satisfying customers?
The Nature and Importance of Marketing Channels
a.
A marketing channel or distribution channel is a set of interdependent
organizations involved in the process of making a product or service
available for use or consumption by the consumer or business user.
b.
A company’s channel decisions directly affect every other marketing
decision.
c.
Distribution channel decisions often involve long-term commitments to
other firms. Therefore, management must design its channels carefully,
with an eye on tomorrow’s likely selling environment as well as today’s.
How Channel Members Add Value
d.
The use of intermediaries results from their greater efficiency in making
goods available in target markets. Through their contacts, experience,
228
e.
f.
specialization, and scale of operation, intermediaries usually offer the firm
more than it can achieve on its own.
Figure 10-1 shows how using intermediaries can provide economies.
The role of marketing intermediaries is to transform the assortments of
products made by producers into the assortments wanted by consumers.
1.
Producers make narrow assortments of products in large quantities,
but consumers want broad assortments of products in small
quantities.
2.
Intermediaries play an important role in matching supply and
demand.
Use Figure 10-1 here.
Use Applications Questions 1 here.
g.
h.
i.
Channel members add value by bridging the major time, place, and
possession gaps that separate goods and services from those who would
use them.
Members of the marketing channel perform many key functions:
1.
Information: gathering and distributing marketing research and
intelligence.
2.
Promotion: developing and spreading persuasive communications
about an offer.
3.
Contact: finding and communicating with prospective buyers.
4.
Matching: shaping and fitting the offer to the buyer’s needs.
5.
Negotiation: reaching an agreement on price and other terms of the
offer.
6.
Physical distribution: transporting and storing goods.
7.
Financing: acquiring and using funds to cover the costs of the
channel work.
8.
Risk taking: assuming the risks of carrying out the channel work.
In dividing the work of the channel, the various functions should be
assigned to the channel members who can add the most value for the cost.
Let’s Discuss This
Mobile phone manufacturers largely distribute their products through service providers
such as Verizon, AT&T Wireless, and T-Mobile. Why have they chosen this method of
distribution?
Number of Channel Levels
j.
Each layer of marketing intermediaries that performs some work in
bringing the product and its ownership closer to the final buyer is a
channel level.
229
Use Key Term Channel Level here.
k.
The number of intermediary levels indicates the length of a channel.
Figure 10-2A shows several distribution channels of different lengths.
1.
A direct marketing channel has no intermediary levels; the
company sells directly to consumers.
2.
An indirect marketing channel contains one or more
intermediaries.
Use Key Terms Direct Marketing Channel, Indirect Marketing Channel here.
Use Figure 10-2 here.
l.
m.
n.
Figure 10-2B shows some common business distribution channels.
1.
A business marketer can use its own sales force to sell directly to
business customers.
2.
Or it can sell to various types of intermediaries, who in turn sell to
these customers.
From the producer’s point of view, a greater number of levels means less
control and greater channel complexity.
The institutions in the channel are connected by several types of flows.
1.
The flows include physical flow of the products, the ownership
flow, the payment flow, the information flow, and the promotion
flow.
2.
These flows can make even channels with only one or a few levels
very complex.
Use Chapter Objective 2 here.
4.
Channel Behavior and Organization
a.
Distribution channels are complex behavioral systems in which people and
companies interact to accomplish individual, company, and channel goals.
1.
Some channel systems consist only of informal interactions among
loosely organized firms.
2.
Others consist of formal interactions guided by strong
organizational structures.
Channel Behavior
b.
Each channel member plays a specialized role in the channel. The channel
will be most effective when each member is assigned the tasks it can do
best.
230
c.
d.
Ideally, all channel firms should work together smoothly. They should
understand and accept their roles, coordinate their activities, and cooperate
to attain overall channel goals.
Although channel members depend on one another, they often act alone in
their own short-run best interests. Disagreements over goals, roles, and
rewards generate channel conflict.
1.
Horizontal conflict occurs among firms at the same level of the
channel.
2.
Vertical conflict is more common; it is conflict between different
levels of the same channel.
3.
Some conflict in the channel takes the form of healthy competition.
4.
Severe or prolonged conflict can disrupt channel effectiveness and
cause lasting harm to channel relationships.
Use Key Term Channel Conflict here.
Vertical Marketing Systems
e.
Historically, conventional distribution channels have lacked leadership
and power, often resulting in damaging conflict and poor performance.
Use Key Term Conventional Distribution Channel here.
f.
One of the biggest channel developments over the years has been the
emergence of vertical marketing systems that provide channel leadership.
Figure 10-3 contrasts the two types of channel arrangements.
1.
A conventional distribution channel consists of one or more
independent producers, wholesalers, and retailers. Each is a
separate business seeking to maximize its own profits.
2.
A vertical marketing system (VMS) consists of producers,
wholesalers, and retailers acting as a unified system. One channel
member owns the others, has contracts with them, or wields so
much power that they must all cooperate. The VMS can be
dominated by either the producer, the wholesaler, or the retailer.
i.
A corporate VMS integrates successive stages of
production and distribution under single ownership.
ii.
A contractual VMS consists of independent firms at
different levels of production and distribution who join
together through contracts to obtain more economies or
sales impact than each could achieve alone.
a. The franchise organization is the most common type.
There are three types of franchises: manufacturersponsored retailer franchiser system; manufacturer-
231
iii.
sponsored wholesaler franchise system; and a servicefirm-sponsored retailer franchiser system.
An administered VMS is one where leadership is assumed
not through common ownership or contractual ties but
through the size and power of one or a few dominant
channel members.
Use Key Terms Vertical Marketing System (VMS), Corporate VMS, Contractual VMS,
Franchise Organization, and Administered VMS here.
Use Figure 10-3 here.
Use Discussing the Issues 1 here.
Horizontal Marketing Systems
g.
A horizontal marketing system is one in which two or more companies at
one level join together to follow a new marketing opportunity. By working
together, companies can combine their financial, production, or marketing
resources to accomplish more than any one company could alone.
h.
Companies might join forces with competitors or noncompetitors. They
might work with each other on a temporary or permanent basis, or they
may create a separate company.
Use Key Term Horizontal Marketing System here.
Use Discussing the Issues 2 here.
Applying the Concept
Why are there bank branches in many grocery stores today? Discuss why this application
of a horizontal marketing system makes sense for both the grocery store and the bank.
Multichannel Distribution Systems
i.
More and more companies have adopted multichannel distribution
systems, which are also called hybrid marketing channels.
j.
This occurs when a single firm sets up two or more marketing channels to
reach one or more customer segments.
k.
Figure 10-4 shows a hybrid channel. These days almost every large
company and many small ones distribute through multiple channels.
l.
With each new channel, the company expands its sales and market coverage and gains opportunities to tailor its products and services to the
specific needs of diverse customer segments.
m.
Multichannel systems are harder to control and they generate conflict as
more channels compete for customers and sales.
232
Use Key Term Multichannel Distribution System here.
Use Figure 10-4 here.
Changing Channel Organizations
n.
One major trend is toward disintermediation—more and more, product
and service producers are bypassing intermediaries and going directly to
final buyers, or to radically new types of channel intermediaries.
o.
This presents problems and opportunities.
1.
To avoid being swept aside, traditional intermediaries must find
new ways to add value in the supply chain.
2.
To remain competitive, product and service producers must
develop new channel opportunities, such as Internet and other
direct channels. Developing these channels brings them into direct
competition with their established channels, resulting in conflict.
Use Key Term Disintermediation here.
Use Marketing at Work 10-1 here.
Use Linking the Concepts here.
Use Discussing the Issues 3 here.
Applying the Concept
Discuss some likely trends in the distribution of automobiles in the 21st century. Will
there be a shift away from exclusive distribution? What might the distribution channel(s)
look like?
5.
Channel Design Decisions
a.
In designing marketing channels, manufacturers struggle between what is
ideal and what is practical.
1.
A new firm with limited capital usually starts by selling in a
limited market area.
2.
In this way, channel systems often evolve to meet market
opportunities and conditions.
b.
Channel analysis and design should be purposeful—decision making
should include analyzing consumer needs, setting channel objectives,
identifying major channel alternatives, and evaluating those alternatives.
Analyzing Customer Needs
c.
Marketing channels are part of the overall customer value delivery
network. Thus, designing the marketing channel starts with finding out
what target consumers want from the channel.
d.
The company must balance consumer needs not only against the feasibility
and costs of meeting these needs, but also against customer price
preferences.
233
Setting Channel Objectives
e.
Companies should state their marketing channel objectives in terms of
targeted levels of customer service. In each segment, the company wants
to minimize the total channel cost of meeting customer service
requirements.
f.
The company’s channel objectives are influenced by the nature of the
company, its products, its marketing intermediaries, its competitors, and
the environment.
g.
Environmental factors such as economic conditions and legal constraints
may affect channel objectives and design.
Identifying Major Alternatives
h.
The company should next identify its major channel alternatives in terms
of types of intermediaries, the number of intermediaries, and the
responsibilities of each channel member.
1.
A firm should identify the types of channel members available to
carry out its channel work.
i.
Company sales force
ii.
Manufacturer’s agency
iii.
Industrial distributors
2.
Companies must also determine the number of channel members to
use at each level.
i.
Intensive distribution is a strategy in which they stock their
products in as many outlets as possible.
ii.
In exclusive distribution, the producer gives only a limited
number of dealers the exclusive right to distribute its
product in their territories.
iii.
In between intensive and exclusive distribution is selective
distribution—the use of more than one, but fewer than all,
of the intermediaries who are willing to carry a company’s
products.
Use Key Terms Intensive Distribution, Exclusive Distribution, and
Selective Distribution here.
Use Discussing the Issues 4 here.
3.
The producer and intermediaries need to agree on the terms and
responsibilities of each channel member.
i.
They should agree on price policies, conditions of sale,
territorial rights, and specific services to be performed by
each party.
ii.
Mutual services and duties need to be spelled out carefully.
234
Evaluating the Major Alternatives
i.
Each alternative should be evaluated against economic, control, and
adaptive criteria.
1.
Using economic criteria, a company compares the likely sales,
costs, and profitability of different channel alternatives.
2.
The company must also consider control issues. Using
intermediaries usually means giving them some control over the
marketing of the product, and some intermediaries take more
control than others.
3.
The company must also apply adaptive criteria. Channels often
involve long-term commitments, yet the company wants to keep
the channel flexible so that it can adapt to environmental changes.
Designing International Distribution Channels
j.
International marketers face many additional complexities in designing
their channels.
k.
Each country has its own unique distribution system that has evolved over
time and changes very slowly.
1.
In some markets, the distribution system is complex and hard to
penetrate, consisting of many layers and large numbers of
intermediaries (e.g., Japan).
2.
At the other extreme, distribution systems in developing countries
may be scattered and inefficient, or altogether lacking (e.g., China
and India).
Use Chapter Objective 3 here.
6.
Channel Management Decisions
a.
Once the company has reviewed its channel alternatives and decided on
the best channel design, it must implement and manage the chosen
channel.
b.
Channel management calls for selecting, managing, and motivating
individual channel members and evaluating their performance over time.
Selecting Channel Members
c.
Producers vary in their ability to attract qualified marketing
intermediaries.
d.
When selecting intermediaries, the company should determine what
characteristics distinguish the better ones. It will want to evaluate each
channel member’s years in business, other lines carried, growth and profit
record, cooperativeness, and reputation.
Managing and Motivating Channel Members
e.
Once selected, channel members must be continuously managed and
motivated to do their best.
235
1.
f.
The company must sell not only through the intermediaries but to
and with them.
2.
They practice strong partner relationship management (PRM) to
forge long-term partnerships with channel members.
In managing its channels, a company must convince distributors that they
can succeed better by working together as a part of a cohesive value
delivery system.
1.
Many companies are now installing integrated high-tech partner
relationship management systems to coordinate their wholechannel marketing efforts.
2.
Companies now use PRM and supply chain management (SCM)
software to help recruit, organize, manage, motivate, and evaluate
relationships with channel partners.
Evaluating Channel Members
g.
The producer must regularly check channel member performance against
standards such as sales quotas, average inventory levels, customer delivery
time, treatment of damaged and lost goods, cooperation in company
promotion and training programs, and services to the customer.
h.
The company should recognize and reward intermediaries who are
performing well and adding good value for consumers. Those who are
performing poorly should be assisted or replaced.
Use Linking the Concepts here.
Use Chapter Objective 4 here.
Use Discussing the Issues 5 here.
7.
Public Policy and Distribution Decisions
a.
For the most part, companies are legally free to develop whatever channel
arrangements suit them.
b.
Laws affecting channels seek to prevent the exclusionary tactics of some
companies that might keep another company from using a desired channel.
Exclusive Dealing
c.
Exclusive distribution occurs when the seller allows only certain outlets to
carry its products. When the seller requires that these dealers not handle
competitors’ products, its strategy is called exclusive dealing.
1.
Both parties can benefit from exclusive arrangements.
2.
But exclusive arrangements also exclude other producers from
selling to these dealers.
i.
This brings exclusive dealing contracts under the scope of
the Clayton Act of 1914.
236
ii.
d.
e.
They are legal as long as they do not substantially lessen
competition or tend to create a monopoly, and as long as
both parties enter into the agreement voluntarily.
3.
Exclusive dealing often includes exclusive territorial agreements.
Producers of a strong brand sometimes sell it to dealers only if the dealers
will take some or all of the rest of the line. This is called full-line forcing.
1.
These tying arrangements may not be illegal, but if they lessen
competition substantially, they do come under the Clayton Act.
Producers are free to select their dealers, but their right to terminate
dealers is somewhat restricted.
1.
Sellers can drop dealers “for cause.”
2.
They cannot drop dealers if, for example, the dealers refuse to
cooperate in a doubtful legal arrangement.
Use Focus on Ethics here.
8.
Marketing Logistics and Supply Chain Management
a.
Companies must decide on the best way to store, handle, and move their
products and services so that they are available to customers in the right
assortments, at the right time, and in the right place.
b.
Physical distribution and logistics effectiveness has a major impact on
both customer satisfaction and company costs.
Use Key Term Marketing Logistics (or Physical Distribution) here.
Nature and Importance of Marketing Logistics
c.
Marketing logistics, also called physical distribution, involves planning,
implementing, and controlling the physical flow of goods, services, and
related information from points of origin to points of consumption to meet
customer requirements at a profit. It involves getting the right product to
the right customer in the right place at the right time.
d.
Marketing logistics addresses not only outbound distribution (moving
products from the factory to resellers and ultimately to customers) but also
inbound distribution (moving products and materials from suppliers to the
factory) and reverse distribution (moving broken, unwanted, or excess
products returned by customers or resellers).
e.
It involves entire supply chain management—managing upstream and
downstream value-added flows of materials, final goods, and related
information among suppliers, the company, resellers, and final consumers.
See Figure 10-5.
237
Use Key Term Supply Chain Management here.
Use Figure 10-5 here.
f.
g.
The logistics manager’s task is to coordinate activities of suppliers,
purchasing agents, marketers, channel members, and customers.
Companies can gain a powerful competitive advantage by pursuing
improved logistics to give customers better service or lower prices.
1.
Improved logistics can yield tremendous cost savings to both the
company and its customers. As much as 20% of an average
product’s price is accounted for by shipping and transportation
alone.
2.
The explosion in product variety has created a need for improved
logistics management.
3.
Improvements in information technology have created
opportunities for major gains in distribution efficiency.
Goals of the Logistics System
h.
No logistics system can both maximize customer service and minimize
distribution costs.
1.
Maximum customer service implies rapid delivery, large
inventories, flexible assortments, liberal return policies, and other
ser-vices—all of which raise distribution costs.
2.
Minimum distribution costs imply slower delivery, smaller
inventories, and larger shipping lots, which represent a lower level
of overall customer service.
i.
The goal of marketing logistics should be to provide a targeted level of
customer service at the least cost.
1.
A company must first research the importance of various
distribution services to customers and then set desired service
levels for each segment.
2.
The objective is to maximize profits, not sales.
Major Logistics Functions
j.
The major logistics functions include warehousing, inventory
management, transportation, and logistics information management.
k.
A company must decide on how many and what types of warehouses it
needs and where they will be located.
1.
A storage warehouse stores goods for moderate to long periods.
2.
Distribution centers are designed to move goods rather than to
store them. They are large and highly automated warehouses
designed to receive goods from various plants and suppliers, take
orders, fill those orders efficiently, and deliver goods to customers
as quickly as possible.
3.
New, single-storied automated warehouses have advanced,
computer-controlled materials-handling systems requiring few
238
employees. Computers and scanners read orders and direct lift
trucks, electric hoists, or robots to gather goods, move them to
loading docks, and issue invoices.
Use Key Term Distribution Center here.
l.
m.
Inventory management also affects customer satisfaction. Here, managers
must maintain the delicate balance between carrying too little inventory
and carrying too much.
1.
Just-in-time logistics systems carry only small inventories of parts
or merchandise, often for only a few days of operation. New stock
arrives exactly when needed, rather than being stored in inventory
until being used.
The choice of transportation carriers affects the pricing of products,
delivery performance, and condition of the goods when they arrive.
1.
Trucks have increased their share of transportation steadily and
now account for 32% of total cargo ton-miles (more than 58% of
actual tonnage). They account for the largest portion of
transportation within cities as opposed to between cities.
2.
Railroads account for 28% of total cargo ton-miles moved. They
are one of the most cost-effective modes for shipping large
amounts of bulk products.
3.
Water carriers, which account for about 16% of cargo ton-miles,
transport large amounts of goods by ships and barges on U.S.
coastal and inland waterways. Although the cost of water
transportation is very low for shipping bulky, low-value,
nonperishable products, water transportation is the slowest mode
and may be affected by the weather.
4.
Pipelines are a specialized means of shipping petroleum, natural
gas, and chemicals from sources to markets.
5.
Although air carriers transport less than 1% of the nation’s goods,
they are an important transportation mode. Airfreight rates are
much higher than rail or truck rates, but airfreight is ideal when
speed is needed or distant markets have to be reached.
6.
The Internet carries digital products from producer to customer via
satellite, cable modem, or telephone wire.
7.
Intermodal transportation is combining two or more modes of
transportation.
i.
Piggyback describes the use of rail and trucks.
ii.
Fishyback is combining water and trucks.
iii.
Trainship combines water and rail.
iv.
Airtruck combines air and trucks.
239
n.
Companies manage their supply chains through information. Channel
partners often link up to share information and to make better joint
decisions.
1.
Information can be shared and managed by mail or telephone,
through salespeople, or through traditional or Internet-based
electronic data interchange (EDI), the computerized exchange of
data between organizations.
2.
Suppliers might be asked to generate orders and arrange deliveries
for their customers. Many retailers set up vendor-managed
inventory systems (VMI) or continuous inventory replenishment
systems. Such systems require close cooperation between buyer
and seller.
Use Key Term Intermodal Transportation here.
Use Discussing the Issues 6 here.
Applying the Concept
How are automobiles shipped to the United States from Japan? How are they distributed
within the United States?
Integrated Logistics Management
o.
Integrated logistics management recognizes that providing better customer
service and trimming distribution costs require teamwork, both inside the
company and among all the marketing channel organizations.
Use Key Term Integrated Logistics Management here.
p.
q.
The goal of integrated supply chain management is to harmonize all of the
company’s logistics decisions.
1.
Some companies have created permanent logistics committees
made up of managers responsible for different physical distribution
activities.
2.
Companies can also create management positions that link the
logistics activities of functional areas.
3.
Companies can employ sophisticated, systemwide supply chain
management software.
The members of a distribution channel are linked closely in delivering
customer satisfaction and value as well as building customer relationships.
1. Smart companies coordinate their logistics strategies and forge
strong partnerships with suppliers and customers to improve
customer service and reduce channel costs.
240
r.
2. Many companies have created cross-functional, cross-company
teams.
3. Other companies partner through shared projects.
Integrated logistics companies, called third-party logistics (3PL)
providers, perform any or all of the functions required to get their clients’
product to market.
1.
Companies use third-party logistics providers for many reasons.
i.
Getting the product to market is the focus of the logistics
provider, so these providers can often do it more efficiently
and at lower cost.
ii.
Outsourcing logistics frees a company to focus more
intensely on its core business.
iii.
Integrated logistics companies understand increasingly
complex logistics environments. This can be helpful to
companies attempting to expand their global market
coverage.
Use Key Term Third-Party Logistics (3PL) Provider here.
Use Chapter Objective 5 here.
Use Marketing at Work 10-2 here.
Travel Log
Discussing the Issues
1. Discuss the differences between a conventional distribution channel, a corporate
VMS, a contractual VMS, and an administered VMS. Give one example of each.
A conventional distribution channel consists of one or more independent producers,
wholesalers, and retailers. A corporate VMS integrates successive stages of production
and distribution under single ownership. Coordination and conflict management are
attained through regular organizational channels (Luxottica).
A contractual VMS
consists of independent firms at different levels of production and distribution who join
together through contracts to obtain more economies or sales impact than each could
achieve alone (Holiday Inn). In an administered VMS, leadership is assumed not through
common ownership or contractual ties but through the size and power of one or a few
dominant channel members (Home Depot).
2. What is a horizontal marketing system? Think of a real world horizontal marketing
system not discussed in the chapter. How does the partnership benefit the companies
involved? How does it benefit the consumer?
In a horizontal marketing system, two or more companies at one level join together to
follow a new marketing opportunity. By working together, companies can combine their
financial, production, or marketing resources to accomplish more than any one company
could alone.
241
3. Define disintermediation. List three industries for which changes in channel systems
have resulted in disintermediation.
Disintermediation occurs when product or service producers cut out intermediaries and
go directly to final buyers, or when radically new types of channel intermediaries
displace traditional ones. Companies such as Dell and American Airlines sell directly to
final buyers, cutting retailers from their marketing channels altogether. In addition,
consumers can buy flowers from Calyx & Corolla (calyxandcorolla.com); clothes from
llbean.com or gap.com; and books, videos, toys, jewelry, consumer electronics, and
almost anything else from Amazon.com— all without ever stepping into a traditional
retail store. Online music download services such as iTunes and Musicmatch are
threatening the very existence of traditional music-store retailers.
4. Discuss the conditions under which a manufacturer might want its distribution to be
exclusive, selective, or intensive. List two products or brands that are currently
distributed at each level. Do you think any of these products might be more
profitable if distributed through a different number of intermediaries?
Producers of convenience products and common raw materials typically seek intensive
distribution—a strategy in which they stock their products in as many outlets as
possible. These products must be available where and when consumers want them. For
example, toothpaste, candy, and other similar items are sold in millions of outlets to
provide maximum brand exposure and consumer convenience. With exclusive
distribution, the producer gives only a limited number of dealers the exclusive right to
distribute its products in their territories. Exclusive distribution is often found in the
distribution of luxury automobiles and prestige women’s clothing. Between intensive and
exclusive distribution lies selective distribution—the use of more than one, but fewer
than all, of the intermediaries who are willing to carry a company’s products. Most
television, furniture, and home appliance brands are distributed in this manner.
5. What is partner relationship management (PRM) and why is it important? How does
PRM impact customer relationship management?
Once selected, channel members must be continuously managed and motivated to do
their best. The company must sell not only through the intermediaries but to and with
them. Most companies see their intermediaries as first-line customers and partners.
They practice strong partner relationship management (PRM) to forge long-term
partnerships with channel members. This creates a marketing system that meets the
needs of both the company and its marketing partners. The channel members a company
works with in some cases work directly with customers. Good partner relationship
management leads to better customer relationship management.
6. List and briefly describe the major logistics functions. Provide an example of a
decision a logistics manager would make for each major function.
The major logistics functions include warehousing (storing their tangible goods while
they wait to be sold), inventory management (maintaining the delicate balance between
carrying too little inventory and carrying too much), transportation (choice of
transportation carriers), and logistics information management. A manager might
242
decide on how many and what types of warehouses are needed and where they will be
located, how much inventory to carry, and which of the five main transportation modes to
employ ( truck, rail, water, pipeline, and air), along with an alternative mode for digital
products ( the Internet, or how to share information).
Application Questions
1. Think of a product that is a part of your daily life. Outline the likely channel
members that work together to bring that product to you. What value does each
member add?
Student responses will vary. Students should include channel members required to move
the product from manufacturer to retailer.
2. Consider a product that you might buy at your local electronics store. How would
your interest in and access to that product change if it were only sold directly from the
manufacturer. What impact, positive or negative, would eliminating channel
members have on the manufacturer’s ability to build and maintain customer
relationships?
Student responses will vary.
3. Discuss the rationale behind the text’s argument that “demand chain” may be a better
term than “supply chain.” Do you agree or disagree? How does the concept of a
value delivery network fit with these two concepts?
The term supply chain may be too limited—it takes a make-and-sell view of the business.
It suggests that raw materials, productive inputs, and factory capacity should serve as the
starting points for market planning. A better term would be demand chain because it
suggests a sense-and-respond view of the market. Under this view, planning starts with
the needs of target customers, to which the company responds by organizing a chain of
resources and activities with the goal of creating customer value. Even a demand-chain
view of a business may be too limited, because it takes a step-by-step, linear view of
purchase-production-consumption activities. With the advent of the Internet and other
technologies, however, companies are forming more numerous and complex
relationships with other firms. For example, Ford manages numerous supply chains. It
also sponsors or transacts on many B2B Web sites and online purchasing exchanges as
needs arise. Like Ford, most large companies today are engaged in building and
managing a continuously evolving value delivery network.
Under the Hood
How often, when shopping online, have you wished you could pick up the phone and get
an immediate answer to a question? How tall is that pool table? Is that software
compatible with my operating system? Providing immediate customer service for those
shopping online can be a real challenge for marketers selling direct. While customers
shopping at Circuit City can ask a salesperson about the features of different digital video
cameras, those shopping online at Buy.com rely on product pictures and descriptions to
answer their questions. To better address consumer concerns and answer questions,
many online retailers offer customer service “live” through an instant messaging “chat”
243
box. Not only can service representatives answer questions, they can guide customers
through a company Web site to find just the right product.
1. Visit Lands’ End online (www.landsend.com) and investigate the company’s
online customer service options. Does live chat appeal to you as a consumer?
Does it add value to Lands’ End’s products?
Student responses will vary. Increased customer service almost always
adds value. In this case, live chat may increase customers’ confidence
when buying, further adding value.
2. Do you think live customer service differentiates Lands’ End from online retailers
without this feature? How does it impact the relationship Lands’ End builds with
customers?
Student responses will vary. Assuming the representatives staffing the
chat lines are well trained and customer focused, the service should help
build relationships. The discourse could easily be tracked and added to a
database of customer information to enhance future, customer-specific
communications and offers.
Focus on Ethics
The explosive growth of the Internet has made it easier and easier for companies to sell
directly to consumers. Although intermediaries were once essential to providing
excellent customer service and creating easy access to a variety of products and services,
the Internet makes it possible for a product manufacturer to sell direct while maintaining,
or even improving, customer service and satisfaction. And, in many cases, to remain
competitive, product and service producers must develop new channel opportunities, such
as Internet and other direct channels. However, developing these new channels often
brings them into direct competition with their established channel partners. For example,
Sony now sells its products directly to consumers on its www.sonystyle.com Web site,
putting it into competition with Sony dealers ranging from small mom-and-pop consumer
electronics chains to giants like Wal-Mart and Best Buy.
1. Is it ethical for product manufacturers to compete with loyal, established channel
members by selling directly to consumers?
Student responses will vary.
2. What impact does channel conflict have on customer relationships?
Some conflict in the channel takes the form of healthy competition. Such
competition can be good for the channel—without it, the channel could
become passive and noninnovative. But, severe or prolonged conflict can
disrupt channel effectiveness and cause lasting harm to channel and
customer relationships.
244
3. How could a manufacturer sell direct while protecting the livelihood of loyal
channel members?
Student responses will vary. Some companies choose to avoid vertical
conflict by selling only through channel members, never directly to
customers.
Those who do sell direct while maintaining channel
relationships may segment customers to avoid having channel members
compete for the same consumers. A company could also limit the items it
sells directly, leaving some products exclusively for dealers to sell.
GREAT IDEAS
Barriers to Effective Learning
1.
2.
3.
4.
5.
6.
Students will probably not have previously considered the complicated nature of
getting products to consumers before, and the concepts of “supply chain” and
“value delivery network” will most likely be foreign. Figure 10-1 is excellent in
showing how complex delivery networks could become without intermediaries,
and an early focus should be placed on this figure. Also, an example of how
difficult it would be for Hershey’s, for example, to deliver one candy bar to one
consumer exactly when that consumer wanted it will very quickly drive home the
need for channels of distribution.
Vertical marketing systems can be difficult to understand. It might actually be
easier to begin discussion of the contractual VMS with the illustration of
franchises. Most students understand that McDonald’s is a franchise organization,
and so the concept will be understood quickly and easily. A corporate VMS then
becomes easy to understand, because those consumer outlets are all owned by the
company whose logo is on the door. Administered VMSs can be illustrated by the
example of Wal-Mart, whose marketplace power has been making news.
Students will recognize horizontal VMSs if they have been in a grocery store
recently. The addition of bank branches, and in some grocery stores, Starbucks
outlets, easily explains this concept.
Multichannel distribution systems can be illustrated through the example of many
PC manufacturers. HP, for instance, sells through many retail outlets, but they
also have their own sales force for businesses. IBM will sell to consumers via its
Web site, to large companies through its own sales force, and to small businesses
through many certified resellers.
The entire textbook has clearly been focused on beginning every planning task
with understanding customer needs, so it should come as no surprise that the first
channel design decision starts at the same place. The same holds true for setting
channel objectives.
The examples in the text of intensive, exclusive, and selective distribution are
highly illustrative and should be reviewed. Additional examples can be provided
in discussion with the students.
245
7.
In marketing logistics, the concepts of inbound and reverse logistics should be
fully explained. Most students, at this point in the chapter, will have no problems
with outbound logistics. However, they will likely not have thought about having
products shipped in to the company; because the chapter focuses on getting
products to market, students will assume that all companies make the decisions
about how to ship their products to their customers, without the customers (in this
case, other companies) having much say about it. The truth is, however, that
effectively managing inbound logistics can save large companies millions of
dollars a year, and so it is a very important concept. Reverse distribution can be
easily understood by discussing the problems of returns and products sent in for
maintenance or repair. An interesting discussion could also ensue regarding the
problem of discarded computers and monitors and even cell phones; while many
of these are still going in the trash, more and more companies are taking them
back in order to recycle them. This is also a reverse distribution issue.
Student Projects
1.
2.
3.
4.
5.
6.
7.
8.
9.
Compare the distribution systems of a service firm and a product firm. What are
the differences? What are the similarities?
Discuss the implications for travel agencies and for consumers of the airlines
selling and distributing tickets via the Internet.
Why do some manufacturers choose not to own their dealers, but instead establish
contractual relationships with them?
Take a product or service of your choice and draw a diagram of the channel of
distribution that is used to bring the product or service to the marketplace.
Research franchise operations. Talk to a local franchise owner and get
information about costs, benefits, and reasons that operations can be successful or
unsuccessful. If you were to choose a franchise to own, what would it be? Why?
Go online and see what type of information you can obtain about your choice.
College students frequently want food late at night, and many of them don’t have
cars to go get it. You are going to launch a business that picks up and delivers
food to on-campus dormitories. Using the information in the text, design your
channel of distribution. What are the needs of the consumer? What are your
channel objectives? Do you want to use any intermediaries?
You are the proud owner of a Krispy Kreme franchise. How would you like your
progress to be evaluated by the corporate parent? Design an evaluation system for
them to use.
What do you think is the most critical function performed in logistics? Explain
why and describe how the field is changing and what you think will happen in the
future.
Consider the field of industrial goods distribution. Why are so many firms in this
area turning to the Internet for ordering and processing of goods? How are cost
efficiencies increased when using the Internet? What new partnerships are being
formed between supplier and distributor via the Internet?
246
Interactive Assignments
Small Group Assignment
1. Form students into groups of three to five. Each group should read the opening
vignette to the chapter on Caterpillar. Each group should then answer the
following questions:
a. What appears to be Caterpillar’s primary distribution strategy? How is this
different from other competitors’ strategies?
b. Why are dealers important to Caterpillar?
c. How is service linked to distribution in the industrial equipment industry?
d. How have Caterpillar’s dealers attempted to build a strong customer
relationship?
e. What is Caterpillar doing right? What is it doing wrong, if anything?
f. What are the basic principles used by Caterpillar to establish strong
partnerships? Which of these do you think is the most important? Explain.
Each group should share its findings with the class.
Individual Assignment
1. Read the opening vignette to the chapter. Think about the answers to the
following questions:
a. What appears to be Caterpillar’s primary distribution strategy?
b. Why are dealers important to Caterpillar?
c. How is service linked to distribution in the industrial equipment industry?
d. How have Caterpillar’s dealers attempted to build a strong customer
relationship?
e. What are the basic principles used by Caterpillar to establish strong
partnerships? Which of these do you think is most important? Explain.
f. What recommendations would you suggest to Caterpillar for the future?
Share your findings with the class.
Think-Pair-Share
1. Consider the following questions, formulate an answer, pair with the student on
your right, share your thoughts with one another, and respond to questions from
the instructor.
a. Are marketing channel decisions among the most important decisions that
management faces? Explain.
b. Why are marketing intermediaries used? Explain.
c. What is a distribution channel?
247
d. What do you think is the most important distribution channel function?
Explain.
e. What is a direct marketing channel? An indirect channel?
f. What is channel conflict and how does it occur? What is generally the
remedy to channel conflict?
g. What are the advantages to a vertical marketing system? What are the
types? Describe each.
h. Characterize the different types of franchise organization.
i. Characterize the three different forms of marketing intermediaries.
j. How is a horizontal marketing system different from a vertical marketing
system?
k. What is disintermediation? How might it be brought on? What role does it
have to play in e-commerce or on the Internet?
l. What is a channel objective?
m. How can channel members be motivated?
n. What public policy acts affect distribution?
o. Characterize the major logistics functions.
p. What is integrated logistics management?
q. When should third-party logistics be used?
Outside Example
A leading industrial conglomerate has an excellent reputation for delivering a highquality material for a largely indoor household application. Their research labs have
found a way to extend this technology to an exterior application and have proven the
concept in a few instances. Now they want to launch the technology into this new market,
and they have asked you to help.
The very first decision is their value delivery network. For the indoor applications, they
supply material to value-added distributors, who take that material and turn it into the
finished product. It then goes to general contractors, who actually install the technology
in consumer’s homes and some businesses. The company is not yet sure that their current
distributors will have a role to play in this new application, but they also don’t want to
just walk away from them in this new application. The company feels like their
distributors have been good to them, so they should return the favor, and some of the
distributors have already helped the company out in getting the few installations they do
have.
Through answering the questions below, help them diagram their new value chain. You
may need to pull in knowledge you gained in previous chapters to answer these questions
effectively.
1. How might a channel partner help the company get to market? Think about the
role the intermediary could play as described in the text.
248
2. How would you reduce and/or eliminate channel conflict if the company elects to
not use the current distributor network?
3. Because this is a market the company has not sold to before, how would you go
about analyzing customer needs?
4. Would you recommend intensive, exclusive, or selective distribution for this
market?
Classroom Exercise/Homework Assignment
Aveda (www.aveda.com) and The Body Shop (www.bodyshop.com) are two cosmetics
and personal care companies that care about the environment. They both use all-natural
ingredients in their products, and they tend to target the same type of consumer. Yet, they
distribute their products in different ways. Visit their Web sites to review their corporate
philosophies and the way their products enter the market.
1.
Compare and contrast the two distribution methods.
Aveda, which started as an independent company but is now owned by Estee Lauder,
distributes largely through salons. Their salon outlets are required to have at least one
employee trained in the Aveda products and methods. They also have some companyowned stores, and regional distributors may also have retail outlets. Their distributor
network includes 11 domestic distributors and 15 more around the world. The
distributors hire account executives and cosmetology professionals to sell the products
and act as educators.
The Body Shop, in contrast, owns all its retail outlets. These outlets are largely found in
malls, making the products somewhat more accessible to consumers. They operate in 50
countries with more than 1,900 outlets.
2.
Of the two distribution philosophies, which one reaches the broadest audience?
Are both companies effectively reaching their target markets?
Most students will be familiar with The Body Shop, but not many will have heard of
Aveda. That is directly related to the two distribution strategies that the companies use:
By utilizing retail outlets in malls, The Body Shop has become a familiar face in our
retail-driven society. Their employees can both explain their products and how to use
them, although they may not have the ability to develop long-term relationships with the
customers.
Aveda, on the other hand, has chosen to focus on the cosmetology sector for getting the
word out. They want to ensure that the hairdressers and makeup professionals who use
and sell their products are not only skilled practitioners, but also understand the
products thoroughly so they can explain them to the ultimate customers, and also teach
those customers how to use the products effectively. Because most women have long-term
249
relationships with their hairdressers, Aveda can in turn develop long-term relationships
with their customers, without having to own the retail outlets.
So, although both companies seem to be focused on the same consumer, they are each
distributing their products in the manner that they think is best for the type of user they
want.
Classroom Management Strategies
Once again we have a chapter with a lot of very important material, but planned
carefully, this chapter can easily be covered in one class period.
1.
2.
3.
4.
5.
The first two sections of this chapter, Supply Chains and the Value Delivery
Network and The Nature and Importance of Marketing Channels, can be covered
in 5 minutes each. Both sections are important for establishing a vocabulary and
baseline for the remainder of the chapter and, as such, are relatively short and to
the point. Utilizing Figures 10-1 and 10-2 will be extremely helpful.
The next section, Channel Behavior and Organization, should be covered in 15
minutes. The concept of vertical marketing systems will most likely take the
majority of that time, because it can be a difficult concept to comprehend.
Utilizing lots of examples will help here, as will asking students for their
knowledge of both vertical and horizontal marketing systems.
Channel Design Decisions should also take 15 minutes to discuss. In this section,
an equal amount of time should be spent on virtually all the subheadings, although
Identifying Major Alternatives may take several minutes longer than the
remaining sections.
The next two major sections, Channel Management Decisions and Public Policy
and Distribution Decisions, can be covered in 5 minutes each. Again, these
sections are short, with the information presented in a concise manner.
Finally, Marketing Logistics and Supply Chain Management can be covered in 10
minutes. Half of this time should be spent on the subsection Major Logistics
Functions. If the students are required to take an Operations Management course,
they will cover these topics in more detail, but if not, this could be the only time
they are exposed to these concepts while in college.
250