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CHAPTER
15
DESIGNING AND
MANAGING VALUE
NETWORKS AND
CHANNELS
LEARNING OBJECTIVES
After reading this chapter, students should:

Know what is a marketing channel system and a value network

Know what work marketing channels perform

Know how channels should be designed

Know what decisions companies face in managing their channels

Know how companies should integrate channels and manage channel conflict

Know what is the future for e-commerce
CHAPTER SUMMARY
Most producers do not sell their goods directly to final users. Between producers and
final users stands one or more marketing channels, a host of marketing intermediaries performing a variety of functions.
Marketing-channel decisions are among the most critical decisions facing manage ment. The company’s chosen channel(s) profoundly affect all other marketing
decisions.
Companies use intermediaries when they lack the financial resources to carry out
direct marketing, when direct marketing is not feasible, and when they can earn more
by doing so. The most important functions performed by intermediaries are
information, promotion, negotiation, ordering, financing, risk taking, physical
possession, payment, and title.
Manufacturers have many alternatives for reaching a market. They can sell direct or
use one-, two-, or three-level channels. Deciding which type(s) of channel to use
calls for analyzing customer needs, establishing channel objectives, and identifying
and evaluating the major alternatives, including the types and numbers of
intermediaries involved in the channel.
Effective channel management calls for selecting intermediaries, training, and
motivating them. The goal is to build a long-term partnership that will be profitable
for all channel members.
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Marketing channels are characterized by continuous and sometimes dramatic change.
Three of the most important trends are the growth of vertical marketing systems,
horizontal marketing systems, and multi-channel marketing systems.
All marketing channels have the potential for conflict and competition resulting from
such sources as goal incompatibility, poorly defined roles and rights, perceptual
differences, and interdependent relationships. Companies can manage conflict by
striving for superordinate goals, exchanging people among two or more channel
levels, co-opting the support of leaders in different parts of the channel, and
encouraging joint membership in and between trade associations.
Channel arrangements are up to the company, but there are certain legal and ethical
issues to be considered with regard to practices such as exclusive dealing or
territories, tying agreements, and dealers’ rights.
E-commerce has grown in importance as companies have adopted “brick-and-click”
channel systems. Channel integration must recognize the distinctive strengths of
online and off-line selling and maximize their joint contributions.
OPENING THOUGHT
Most students are not familiar with channels of distribution, except, perhaps, from the
retailer in which they have bought products. Therefore, the instructor has to ensure that
they clarify the various channels of distribution during this chapter lecture. Examples of
the various channels for products familiar to the students can help illustrate the
complexity of the process.
Second, because marketing channel decisions are mostly hidden from the final consumer,
the instructor should make every effort to diagram the decision-making process for each
level of channel distribution. Starting with the retail price of the product, then subtracting
each distribution level margins or markups shows the effects of distribution to or for the
product.
Managing channels of distribution will be new to most students, as will the definitions of
channel conflict and channel support. The instructor can best serve the student by fully
diagramming a particular product from a channel of distribution perspective and talking
about channel roles, conflicts, training, and motivation.
The students will probably be most interested in, or knowledgeable about, e-commerce
and see e-commerce as the future of business. The instructor should caution the students
about assuming that all business transactions (or a great majority of them) will flow to
e-commerce by describing to the students the various consumer demographic groups,
buying habits, and comfortableness with technology. An in-class discussion on the merits
and demerits of e-commerce should provide for a lively cross-section of opinions.
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TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long project, students should present their channel
decisions for getting their product or service to the consumer. In evaluating this
section, the instructor should evaluate the completeness of the projects to the material
contained in this chapter.
2. Progressive companies have begun developing a value network system to get
products in the hands of consumers. A value network includes a firm’s suppliers, its
suppliers’ suppliers, its immediate customers, and their end customers. Students
should identify a company that has successfully set up a value network, then compare
and contrast the components of the value system to a competitor that does not have
one. Students should be able to identify the components of the value network that
produced the augmented offering.
3. Sonic PDA Marketing Plan Manufacturers need to pay close attention to their
marketing channels. By planning the design, management, evaluation, and
modification of their marketing channels, manufacturers can ensure their products are
available when and where customers want to buy.
At Sonic, you have been asked to develop a channel strategy for Sonic 1000. Based
on the information you previously gathered and the decisions you have already made
about the target market, product, and pricing, answer the following:




What decisions must Sonic make to develop the five marketing flows (physical
product, title, payment, information, and promotion) for Sonic 1000?
How many levels would be appropriate for the consumer and business markets
you are targeting for Sonic 1000?
Should you plan for exclusive, selective, or intensive distribution?
What decisions must Sonic make to develop the five service outputs (lot size,
waiting time, spatial convenience, product variety, and service back up) for Sonic
1000?
Document your recommendations about marketing channels and strategy in a written
marketing plan or type the recommendations into the Marketing Mix and Channels
sections of Marketing Plan Pro.
ASSIGNMENTS
Small Group Assignments
1. The opening vignette of this chapter talks about Kmart’s decline into bankruptcy in
January of 2002. The causes cited, in part, for the bankruptcy were poor locations,
unfavorable image, and a poor replenishment system. In an out-of-class assignment,
students should visit local Kmart stores, to see if their impressions confirm that the
firm is overcoming these difficulties or if problems remain. Student answers should
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be specific. Such as X item was advertised but was not in stock at the time of the
store visit, store Y’s parking lot was not lighted well enough to convey a feeling of
safety, etc.
2. The chapter refers to the firm SeaYu Enterprises Inc. as one firm taking a slow and
steady approach to channel development for its pioneering product. Students should
do research and find two or three other examples of start-up firms, entrepreneurs, and
others engaged in a one-channel distribution approach for its products. After
completing the research, students should comment on what they see as disadvantages
or advantages such an approach offers the firms. Does such a strategy increase the
“buzz” for the product (exclusivity) or does such a strategy ultimately frustrate
consumers who try to find the product in their local retailers and cannot?
Individual Assignments
1. Today, some of the countries more successful companies are using a hybrid channel
system to increase its effectiveness of reaching the consumer. The text uses the
examples of IBM, Charles Schwab, and others and notes that channel integration and
its features are what the consumer prefers. Students should choose or find one
additional example of a firm using the hybrid system, and comment on how they see
this system delivering value to the consumer. Student answers should be directed
toward the three features of channel integration found in the textbook.
2. In the Marketing Insight article entitled, M-Commerce Opens up New Opportunities
For Marketers, the author, Douglas Lamont, talks about a new field called
m-commerce. Comment upon the stated advantages and disadvantages of mcommerce or location-based services for marketers. Specifically, knowing what you
now know about consumer buying decision-making, will e-commerce have to change
consumer-buying habits to be successful? Alternatively, will this field have to wait
until today’s younger consumers grow older to become another channel alternative
for marketers?
Think-Pair-Share
1. Read the Marketing Insight entitled, Burst of the Dot-Com Bubble, the author
suggests that the “dot-coms” failed for a variety of reasons. Comment on how this
channel of distribution (the Internet) has been affected by these well publicized
failures. Specifically, are consumers more adapt to shop online or “once burned,” are
consumers turning to the more traditional channels of distribution for their shopping?
Students should include in their answers data from the most recent holiday season to
analyze consumer-buying trends.
2. Channel members add value to the consumer’s purchase of certain products and
services. Table 15.1 details key channel member functions. Yet some firms have
abandoned channel partners and tried to reach the consumer on a one-to-one basis.
Selecting a product or firm that (a) is maintaining it channel members, and (b) a firm
that has decided to sell directly to the consumer thus bypassing channel
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intermediaries. Comment on these two systems in terms of the information contained
in the chapter.
MARKETING TODAY—CLASS DISCUSSION TOPICS
In late 2003–early 2004, Levi Strauss and Company introduced a line of jeans
specifically for the mass-merchant stores, called Levi Strauss Signature™. In addition,
Levi Strauss and Company introduced a new line of jeans called Type 1™ to be sold in
mid- and high-tier department and chain stores. Considering the advantages and
disadvantages of channel partnerships, the importance of the marketing channel system,
discuss the implications that this decision is to have on Levi’s more traditional (high-end
department stores) channel partners. Specifically, is Levi’s decision to move from
selective distribution to an intensive distribution network, likely to produce increased
channel conflict for Levi? If the answer is yes, what can Levi Strauss do to minimize
such conflict? Speculate on why you think that Levi Strauss made such a decision?
END-OF-CHAPTER SUPPORT
MARKETING DEBATE—Does It Matter Where You Are Sold?
Some marketers feel that the image of the particular channel in which they sell their products
does not matter—all that matters is that the right customers shop there and the product is
displayed in the right way. Others maintain that channel images—such as a retail store—can
be critical and must be consistent with the image of the product.
Take a position: Channel images do not really affect the brand images of the products they
sell that much versus channel images must be consistent with the brand image.
Pro: Buyers buy products or use services to meet a particular need or want. In the marketingdecision making process, a consumer has a preformed image of the product or service based
upon the company’s reputation or marketing messages. Therefore, where the consumer finally
purchases the product is immaterial to the consumer, as long as, the product performs to
expectations and that the process of purchasing the product is as simplified as possible.
Strongly advertised products, or those products, with strong brand names will have consumers
seeking out their products regardless of which channel of distribution the company uses. Some
marketers benefit from extensive distribution channels, as their products are impulse items,
last minute decision items, or cater to consumer habits. For marketers of these items, it is
important for them to be available when the consumers’ desires strike.
Con: The consumer buying process, the consumer “value proposition,” changes and reflects
shifting priorities based on the individual needs and wants of the consumer at the time of
purchase. For key products or services, consumers require, and even demand, different levels
of service, attention, or “exclusivity” in the purchase. These consumers’ needs can and are met
by different channels of distribution and are influenced by what channel or channels of
distribution the producer uses; how well trained and motivated the channel is; and how the
channel services the customer.
There is no “correct” or “optimum” channel of distribution for all products. As products flow
through a life cycle, older channels will evaporate and newer ones will develop. As consumer
attitudes, positions, and usages of the products change, the consumers will navigate to
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differing channels. A product sold at one time through exclusive dealerships, at the beginning
of its life cycle, may now be sold through mass-merchants or discounters at the end of its
product life cycle.
MARKETING DISCUSSION
Think of your favorite retailers. How have the retailers integrated channel systems? How
would you like to see channels integrated? Do you use multiple channels from the retailers?
Why?
Student answers will differ depending upon their favorite retailers. However, all answers
should include the definition of channel integration:
Customers expect channel integration, characterized by the following features:
1. The ability to order a product online and pick it up at a convenient retail location.
2. The ability to return an online ordered product to a nearby store of the retailer.
3. The right to receive discounts based on total online and off-line purchases
MARKETING SPOTLIGHT—Amazon
Discussion Questions:
1) What have been the key success factors for Amazon?
a. They have a strategic concept—vastly broader selection of titles than could be
found in most local bookstores.
b. Marketing channels must not just serve markets, they must also make markets.
c. Replicated the features of a physical bookstore in its online channel.
d. Offered personalized recommendation service.
e. Offered a built-in ranking system.
f. Offered peeks into the book.
2) Where is Amazon vulnerable?
a. Competitors duplicating or improving upon Amazon’s presence.
b. Discounters.
c. Changes in technology and the use of technology by consumers.
3) What should Amazon watch out for?
a. Technological changes, difficulties, and emerging technologies.
b. Changes in consumer buying patterns and interests in reading.
4) What recommendations would you make to senior marketing executives going
forward?
a. Do not rest on past successes—continue your strategic direction.
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b. Monitor changes in your target market’s definition of “service” and adapt to
those changes.
c. Resist opportunities to expand your market (width and breath) so that you
begin to “lose” your “identity” with the consumer as to what your company
means to them.
5) What should the company be sure to do with their marketing?
a. Emphasize your strengths in variety, selection, service, price, and
convenience.
DETAILED CHAPTER OUTLINE
Successful value creation needs successful value delivery. Holistic marketers are
increasingly taking a value network view of their businesses. Instead of limiting their
focus to their immediate suppliers, distributors, and customers, they are examining the
whole supply chain that links raw materials, components, and manufactured goods and
shows how they move toward the final consumers.
Companies are looking at the suppliers’ suppliers upstream and at the distributors’
customers downstream. Each are looking at customer segments and how company
resources can best be organized to meet needs.
Companies today must build and manage a continuously evolving value network.
MARKETING CHANNELS AND VALUE NETWORKS
Most producers do not sell their goods directly to the final users; between them
stands a set of intermediaries performing a variety of functions.
A) These intermediaries constitute a marketing channel (also called a trade channel or
distribution channel).
B) Marketing channels are sets of interdependent organizations involved in the process
of making a product or service available for use or consumption.
C) Some intermediaries buy, take title to, and resell the merchandise, they care called
merchants.
D) Others search for customers and may negotiate on the producer’s behalf but do not
take title to the goods, they are called agents.
E) Still others assist in the distribution process but neither takes title to goods nor
negotiates purchases or sales, they are called facilitators.
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The Importance of Channels
A marketing channel system is the particular set of marketing channels employed by a
firm.
A) Decisions about the marketing channel system are among the most critical facing
management.
B) In the United States, channel members collectively earn margins that account for 30 to
50 percent of the ultimate selling price.
C) Marketing channels also represent a substantial opportunity cost.
1) Converting potential buyers into profitable orders is one of the chief roles of
marketing channels.
2) Marketing channels must not just serve markets, they must also make markets
D) The channels chosen affect all other marketing decisions:
1) The company’s pricing depends on whether it uses mass-merchandisers or highquality boutiques.
2) The firm’s sales force and advertising decisions depend on how much training and
motivation dealers need.
E) In addition, channel decisions involve relatively long-term commitments to other
firms as well as a set of policies and procedures.
F) In managing its intermediaries, the firm must decide how much effort to devote to
push versus pull marketing.
1) A push strategy involves the manufacturer using its sales force and trade
promotion money to induce intermediaries to carry, promote, and sell the product
to end user.
a. Push strategy is appropriate where there is low brand loyalty in a category,
brand choice is made in the stores, the product is an impulse item, and product
benefits are well understood.
2) A pull strategy involves the manufacturer using advertising and promotion to
induce consumers to ask intermediaries for the product, thus inducing the
intermediaries to order it.
a. Pull strategy is appropriate when there is high brand loyalty and high
involvement in the category, when people perceive differences between
brands, and when people choose the brand before they go to the store.
Review Key Definitions here: marketing channels, merchants, agents, facilitators,
push strategy and pull strategy
Channel Development
A new firm typically starts as a local operation selling in a limited market, using
existing intermediaries. If the firm is successful, it might branch into new markets
and use different channels in different markets.
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A) Today’s successful companies are also multiplying the number of “go-to-market” or
hybrid channels in any one-market area.
B) Companies that manage hybrid channels must make sure these channels work well
together and match each target customer’s preferred ways of doing business.
C) Customers expect channel integration, characterized by the following features:
1) The ability to order a product online and pick it up at a convenient retail location.
2) The ability to return an online ordered product to a nearby store of the retailer.
3) The right to receive discounts based on total online and off-line purchases.
D) Different consumers have different needs during the purchase process.
E) Nunes and Cespedes argue that in many markets, buyers fall into one of four
categories:
1) Habitual shoppers.
2) High value deal seekers.
3) Variety-loving shoppers.
4) High-involvement shoppers.
F) The same consumer may choose to use different channels for different functions in
making a purchase.
G) Consumers may seek different types of channels depending on the particular types of
goods involved.
1) Some consumers are willing to “trade up.”
2) Others are willing to “trade down.”
Value Networks
A supply chain view of a firm sees markets as destination points and amounts to a linear
view of the flow. The company should first think of the target market, and then design
the supply chain backward from that point.
A) This view has been called demand chain planning.
B) An even broader view sees a company at the center of a value network—a system of
partnerships and alliances that a firm creates to source, augment, and deliver its
offerings.
C) A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate
customers, and their end customers.
D) A company needs to orchestrate these parties to enable it to deliver superior value to
the target market.
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E) Demand chain planning yields several insights:
1) The company can estimate whether more money is made upstream or
downstream.
2) The company is more aware of disturbances anywhere in the supply chain that
might cause costs, prices, or supplies to change suddenly.
3) Companies can go online with their business partners to carry on faster and more
accurate communications, transactions, and payments to reduce costs, speed up
information, and increase accuracy.
F) Managing this value network has required companies to make increasing investments
in information technology (IT) and software.
G) Marketers have traditionally focused on the side of the value network that looks
toward the customer. In the future, they will increasingly participate in, influence their
companies’ upstream activities, and become network managers.
Review Key Definitions here: hybrid, channel integration, demand chain planning,
and value network
THE ROLE OF MARKETING CHANNELS
Why would a producer delegate some of the selling job to intermediaries?
Delegation means relinquishing some control over how and to whom the products
are sold. Producers do gain several advantages by using intermediaries.
A) Many producers lack the financial resources to carry out direct marketing.
B) Producers who do establish their own channels can often earn a greater return by
increasing investment in their main business.
C) In some cases direct marketing simply is not feasible.
D) Intermediaries normally achieve superior efficiency in making goods widely available
and accessible to target markets.
1) Through their contacts, experiences, specialization, and scale of operations,
intermediaries usually offer the firm more than it can achieve on its own.
Figure 15.1 shows one major source of cost savings using intermediaries.
Channel Functions and Flows
A marketing channel performs the work of moving goods from producers to
consumers. It overcomes the time, place, and possession gaps that separate goods
and services from those who need and want them.
A) Members of the marketing channel perform a number of key functions.
Figure 15.1 shows how a distributor increases efficiency.
B) Some functions constitute a forward flow of activity from the company to the
customer.
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C) Other functions constitute a backward flow from customers to the company.
D) Still others occur in both directions.
Figure 15.2 shows five flows.
E) A manufacturer selling a physical product and services might require three
channels:
1) A sales channel.
2) A delivery channel.
3) A service channel.
F) The question is not whether various channel functions need to be performed but
rather, who is to perform them.
G) All channel functions have three things in common:
1) They use up scarce resources.
2) They can often be performed better though specialization.
3) They can be shifted among channel members.
Review Key Definitions here: forward flow, backward flow, sales channel, delivery
channel, and service channel
Channel Levels
The producer and the final consumer are part of every channel.
Figure 15.3 illustrates several consumer-goods marketing channels of different
lengths.
A) A zero-level channel (also called a direct-marketing channel) consists of—a
manufacturer selling directly to the final consumer.
B) A one-level channel contains one selling intermediary—such as a retailer.
C) A two-level channel contains two intermediaries—wholesaler and a retailer.
D) A three-level channel contains—wholesalers, jobbers, and retailers.
Figure 15.3(b) shows channels commonly used in industrial marketing.
A) Channels normally describe a forward movement of products from source to user.
B) One can also talk about reverse-flow channels.
C) Reverse-flow channels are important in the following cases:
1) To reuse products or containers.
2) To refurbish products for resale.
3) To recycle products.
4) To dispose of products and packaging.
D) Several intermediaries play a role in reverse-flow channels.
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Service Sector Channels
Marketing channels are not limited to the distribution of physical goods. Producers
of services and ideas also face the problem of making their output available and
accessible to target populations.
A) Marketing channels also keep changing in “person” marketing.
B) As the Internet and other technologies advance, service industries are taking place
through new channels.
CHANNEL-DESIGN DECISIONS
Designing a marketing channel system involves analyzing customer needs,
establishing channel objectives, identifying major channel alternatives, and
evaluating major channel alternatives.
Analyzing Customers’ Desired Service Output Levels
In designing the marketing channel, the marketers must understand the service
output levels desired by target customers.
A) Channels produce five service outputs:
1) Lot size.
2) Waiting and delivery time.
3) Spatial convenience.
4) Product variety.
5) Service backup.
B) The marketing-channel designer knows that providing greater service outputs
means increased channel costs and higher prices for customers.
Establishing Objectives and Constraints
Channel objectives should be stated in terms of targeted service output levels.
A) Channel institutions should arrange their functional tasks to minimize total channel
costs and still provide desired levels of service outputs.
B) Planners can identify several market segments that want different service levels.
C) Channel objectives vary with product characteristics.
D) Channel design must take into account the strengths and weaknesses of different types
of intermediaries.
E) Legal regulations and restrictions also affect channel design.
Identifying Major Channel Alternatives
Companies can choose from a wide variety of channels for reaching customers—from
sales forces, to agents, distributors, dealers, direct mail, telemarketing, and the Internet.
A) Each channel has unique strengths as well as weaknesses.
B) Most companies now use a mix of channels.
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C) Each channel hopefully reaches a different segment of buyers and delivers the right
products to each at the least cost.
D) A channel alternative is described by three elements:
1) The types of available business intermediaries.
2) The number of intermediaries needed.
3) The terms and responsibilities of each channel member.
Types of Intermediaries
A firm needs to identify the types of intermediaries available to carry on its channel
work.
Table 15.2 lists channel alternatives.
A) Companies should search for innovative marketing channels.
B) Sometimes a company chooses an unconventional channel because of the difficulty or
cost of working with the dominant channel.
C) The advantage is that the company will encounter less competition during the initial
move into this channel.
Price Sensitivity
Companies have to decide on the number of intermediaries to use at each channel level.
Three strategies are available: exclusive distribution, selective distribution, and
intensive distribution.
A) Exclusive distribution means severely limiting the number of intermediaries.
1) It is used when the producer wants to maintain control over the service level and
outputs offered by the resellers.
2) Often it involves exclusive dealing arrangements.
B) Exclusive deals between suppliers and retailers are becoming a mainstay for
specialists looking for an edge in a business world.
C) Selective distribution involves the use of more than a few, but less than all, of the
intermediaries who are willing to carry a particular product
D) Intensive distribution consists of the manufacturer placing goods or services in as
many outlets as possible.
E) Manufacturers are constantly tempted to move from exclusive or selective distribution
to intensive distribution to increase coverage and sales.
Review Key Definitions here: exclusive distribution, exclusive dealing, selective
distribution, and intensive distribution
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Terms and Responsibilities of Channel Members
The producer must determine the rights and responsibilities of participating channel
members.
A) The main elements in the “trade-relations mix” are:
1) Price policy.
2) Conditions of sale.
3) Distributors’ territorial rights.
4) Mutual services and responsibilities.
Evaluating the Major Alternatives
Each channel alternative needs to be evaluated against economic, control, and
adaptive criteria.
Economic Criteria
A) Each channel will produce a different level of sales and costs.
Figure 15.4 shows how six different sales channels stack up in terms of the value
added per sale and the cost per transaction
B) When sellers discover a convenient lower-cost channel, they try to get their customers
to us it.
C) Companies that are successful in switching customers to lower-cost channels,
assuming no loss of sales or deterioration in service quality, will gain a channel
advantage.
Figure 15.5 shows the cost schedules for the North Carolina furniture
manufacturer.
Control and Adaptive Criteria
To develop a channel, members must make some degree of commitment to each
other for a specified period of time
A) Yet these commitments invariably lead to a decrease in the producer’s ability to
respond to a changing marketplace.
B) In rapidly, changing, volatile, or uncertain product markets, the producer needs
channel structures and policies that provide high adaptability.
CHANNEL-MANAGEMENT DECISIONS
After a company has chosen a channel alternative, individual intermediaries must be
selected, trained, motivated, and evaluated. Channel arrangements must be modified
over time.
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Selecting Channel Members
Companies need to select their channel members carefully.
A) To facilitate channel member selection, producers should determine what
characteristics distinguish better intermediaries.
B) They should evaluate the:
1) Number of years in business.
2) Other lines carried.
3) Growth and profit records.
4) Financial strength.
5) Cooperativeness.
6) Service reputation.
C) If the intermediaries are sales agents, producers should evaluate the:
1) Number and character of other lines carried.
2) Size and quality of the sales force.
D) If the intermediaries are department stores that want exclusive distribution, the
producer should evaluate:
1) Locations.
2) Future growth potential.
3) Type of clientele.
Training Channel Members
Companies need to plan and implement careful training programs for their
intermediaries.
Motivating Channel Members
A company needs to determine intermediaries’ needs and construct a channel position
such that its channel offering is tailored to provide superior value to these
intermediaries.
A) Stimulating channel members to top performance starts with understanding their needs
and wants.
B) The company should provide training programs and market research programs to
improve intermediaries’ performance.
C) The company must constantly communicate its view that the intermediaries are
partners in a joint effort to satisfy end users of the product.
D) Producers vary greatly in skill in managing distributors.
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E) Channel power can be defined as the ability to alter channel member’s behavior.
F) Manufacturers can draw on the following types of power to elicit cooperation:
1) Coercive power.
2) Reward power.
3) Legitimate power.
4) Expert power.
5) Referent power.
G) Coercive and reward power are objectively observable.
H) Legitimate, expert, and referent power are more subjective and dependent on the
ability and willingness of parties to recognize them.
I) Most producers see gaining intermediaries cooperation as a huge challenge.
J) Companies that are more sophisticated try to forge a long-term partnership with
distributors.
Review Key Definitions here: channel power, coercive power, reward power,
legitimate power, expert power, and referent power
Evaluating Channel Members
Producers must periodically evaluate intermediaries performance against such
standards as sales quota attainment, average inventory levels, customer delivery
times, treatment of damaged and lost goods, and cooperation in promotional and
training programs.
A) Under performers need to be counseled, retrained, motivated, or terminated.
Modifying Channel Arrangements
A producer must periodically review and modify its channel arrangements.
A) Modification becomes necessary when the distribution channel is not working as
planned.
B) When consumer-buying patterns change.
C) When the market expands.
D) When new competition arises.
E) When innovative distribution channels emerge.
F) And when the product moves into the later stages in the product life cycle.
G) No marketing channel will remain effective over the whole product life cycle.
H) In competitive markets with low entry barriers, the optimal channel structure will
inevitably change over time.
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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 goods.
I) The most difficult decision involves revising the overall channel strategy.
CHANNEL INTEGRATION AND SYSTEM
Distribution channels do not stand still. New wholesaling and retailing institutions
emerge, and new channel systems evolve.
Vertical Marketing Systems
One of the most significant recent channel developments is the rise of vertical marketing
systems.
A) A conventional marketing system comprises an independent producer, wholesaler(s),
and retailer(s).
B) A vertical marketing system (VMS), by contrast, comprises the producer,
wholesaler(s), and retailer(s) acting as a unified system.
1) One channel member, the channel captain, owns the others, franchises them, or
has so much power that they all cooperate.
C) VMSs arose as a result of strong channel members’ attempts to control channel
behavior and eliminate the conflict that results when independent members pursue
their own objectives.
D) VMSs achieve economies through:
1) Size.
2) Bargaining power.
3) The elimination of duplicated services.
E) There are three types of VMS:
1) Corporate.
2) Administered.
3) Contractual.
Corporate VMS
A) A corporate VMS combines successive stages of production and distribution under
single ownership.
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Administered VMS
A) An administered VMS coordinates successive stages of production and distribution
through the size and power of one of the members.
B) Manufacturers of a dominant brand are able to secure strong trade cooperation and
support from resellers.
C) The most advanced supply-distributor arrangement for administered VMS involves
distribution programming that can be defined as building a planned, professionally
managed, vertical marketing system that meets the needs of both manufacturer and
distributors.
D) The manufacturer establishes a department within the company called distributorrelations planning.
1) Its job is to identify distributor needs and build up merchandising programs to help
each distributor operate as efficiently as possible.
Contractual VMS
A) A contractual VMS consists of independent firms at different levels of production and
distribution integrating their programs on a contractual basis to obtain more economies
or sales impact than they could achieve alone.
B) Contractual VMSs now constitute one of the most significant developments in the
economy.
C) They are of three types:
1) Wholesaler-sponsored voluntary chains.
2) Retailer cooperatives.
3) Franchise organizations.
D) The traditional system is the manufacturer-sponsored retailer franchise.
E) Another is the manufacturer-sponsored wholesaler franchise.
F) A new system is the service-firm-sponsored retailer franchise
Review Key Definitions here: conventional marketing system, vertical marketing
system (VMS), channel captain, corporate VMS, administered VMS, distribution
programming, distributor-relations planning, contractual VMS, manufacturersponsored retailer franchise, manufacturer-sponsored wholesaler franchise, and
service-firm-sponsored retailer franchise.
The New Competition in Retailing
The new competition in retailing is no longer between independent business units
but between whole systems of centrally programmed networks (corporate,
administered, and contractual) competing against one another to achieve the best
cost economies and customer response.
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Horizontal Marketing Systems
Another channel development is the horizontal marketing system, in which two or
more unrelated companies put together resources or programs to exploit an
emerging marketing opportunity.
Multi-Channel Marketing Systems
Once, many companies sold to a single market through a single channel. Today,
with the proliferation of customer segments and channel possibilities, more
companies have adopted multi-channel marketing.
A) Multi-channel marketing occurs when a single firm uses two or more marketing
channels to reach one or more customer segments.
B) By adding more channels, companies can gain three important benefits:
1) Increased market coverage.
2) Lower channel cost.
3) More customized selling.
C) The gains from adding new channels come at a price:
1) New channels typically introduce conflict and control problems.
2) Two or more channels may end up competing for the same customers.
3) The new channel may be more independent and make cooperation more difficult.
Planning Channel Architecture
Clearly, companies need to think through their channel architecture.
A) Moriarty and Moran propose using the hybrid grid to plan the channel
architecture.
Figure 15.6 presents the Hybrid grid.
1) The grid shows several marketing channels (rows).
2) Several demand-generation tasks (columns).
3) The grid illustrates why using only one channel is not efficient.
B) Companies should use different channels for selling to different-size customers.
C) Multi-channel marketers also need to decide how much of their product to offer in
each of the channels.
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CONFLICT, COOPERATION, AND COMPETITION
Channel conflict is generated when one channel member’s actions prevents the channel
from achieving its goal. Channel coordination occurs when channel members are
brought together to advance the goals of the channel, as opposed to their own
potentially incompatible goals.
Types of Conflict and Competition
A) Vertical channel conflict means conflict between different levels within the same
channel.
B) Horizontal channel conflict involves conflict between members at the same level
within the channel.
C) Multi-channel conflict exists when the manufacturer has established two or more
channels that sell to the same market.
1) Multi-channel conflict is likely to be especially intense when the members of one
channel get a lower price (based on larger volume purchases) or work with a lower
margin.
Review Key Definitions here: vertical channel conflict, horizontal channel conflict,
and multi-channel conflict
Causes of Channel Conflict
A) One major cause is goal incompatibility.
B) Some conflict arises from unclear roles and rights.
C) Conflicts can also stem from differences in perception.
D) Conflict might additionally arise because of the intermediary’s dependence on the
manufacturer.
Managing Channel Conflict
As companies add channels to grow sales, they run the risk of creating channel conflict.
Some channel conflict can be constructive and lead to better adaptation to a changing
environment, but too much is dysfunctional. The challenge is not to eliminate conflict
but to manage it better.
A) There are several mechanisms for effective conflict management.
1) One is the adoption of superordinate goals
a. Channel members come to an agreement on the fundamental goal they are
jointly seeking.
2) A useful step is to exchange persons between two or more channel levels.
3) Co-optation is an effort by one organization to win the support of the leaders of
another organization by including them in advisory councils, and the like.
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4) Much can be accomplished by encouraging joint membership in and between
trade associations.
5) When conflict is chronic or acute, the parties may have to resort to:
a. Diplomacy.
b. Mediation.
c. Arbitration.
d. Lawsuits.
Legal and Ethical Issues in Channel Relations
Companies are legally free to develop whatever channel arrangements suit them. In
fact, the law seeks to prevent companies from using exclusionary tactic that might keep
competitors from using a channel.
A) Many producers like to develop exclusive channels for their products.
1) When the seller requires that these dealers not handle competitors’ products, this is
called exclusive dealing.
2) Exclusive dealing is 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.
a. The producer may agree not to sell to other dealers in a given area.
b. The buyer may agree to sell only in its own territory.
(i) This second practice has become a major legal issue.
B) Producers of a strong brand sometimes sell it to dealers only if they will take some or
all of the rest of the line.
1) This practice is called full-line forcing.
C) Such tying agreements are not necessarily illegal, but they do violate U.S. law if they
tend to lessen competition substantially.
D) Producers are free to select their dealers, but their right to terminate dealers is
somewhat restricted
1) Producers can drop dealers for “cause” but they cannot drop dealers if, the dealer
refuses to cooperate in doubtful legal arrangements.
Review Key Definitions here: co-optation, diplomacy, mediation, arbitration,
lawsuits, exclusive dealing, full-line forcing, and tying agreements
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E-COMMERCE MARKETING PRACTICES
E-business describes the use of electronic means and platforms to conduct a
company’s business.
A) E-commerce means that the company or site offers to transact or facilitate the selling
of products and services online.
B) E-purchasing means companies decide to purchase goods, services, and information
from various online suppliers.
C) E-marketing describes company efforts to inform, communicate, promote, and sell its
products and services over the Internet.
D) We can distinguish between pure-click companies and brick-and-click companies.
Pure-Click Companies
There are several kinds of pure-click companies:
A) Search engines.
B) Internet Service Providers (ISPs).
C) Commerce sites.
D) Transaction sites.
E) Content sites.
F) Enabler sites.
G) The Internet is most useful for products and services when the shopper seeks:
1) Greater ordering convenience.
2) Lower cost.
3) When buyers need information about product features and prices.
H) The Internet is less useful for:
1) Products that must be touched or examined in advance.
The Dot.Com Bubble
Table 15-3 displays some common misperceptions as to the current state of
e-business.
A) Companies must set up and operate their e-commerce Web sites carefully.
B) Customer service is critical.
Business-to-Business E-Commerce
A) More activity is being conducted on business-to-business (B2B) sites.
B) The impact of B2B sites is to make markets more efficient.
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C) With the Internet, buyers have easy access to a great deal of information.
D) They can get information from:
1) Supplier Web sites.
2) Infomediaries.
3) Market makers.
4) Customer communities.
E) Suppliers of superior products will be able to offset price transparency with value
transparency.
1) Suppliers of undifferentiated products will have to drive down their costs in order
to compete.
Review Key Definitions here: e-commerce, e-purchasing, e-marketing, pure-click,
brick-and-click, search engines, Internet Service Providers (ISPs), commerce sites,
transaction sites, content sites, Enabler sites, supplier Web sites, infomediaries,
market makers, and customer communities
Brick-and-Click Companies
Many companies have agonized over whether to add an online e-commerce
channel. Many companies opened Web sites describing their business but resisted
adding e-commerce to their sites. They felt that selling their products or services
online would produce channel conflict.
A) Adding an e-commerce channel creates the treat of a backlash from retailers, brokers,
agents, or other intermediaries.
B) The question is how to sell both through intermediaries and online.
C) There are at least three strategies for trying to gain acceptance from intermediaries:
1) Offer different brands or products on the Internet.
2) Offer the off-line partners higher commissions to cushion the negative impact on
sales.
3) Take orders on the Web site but have retailers deliver and collect payment.
D) Some pure or predominately online companies have invested in brick-and-mortar
sites.
E) Ultimately, companies may need to decide whether to drop some or all of their
retailers and go direct.
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