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Marketing ChannelsMarketing Channels
A Strategic Tool of Growing Importance for the Next Millennium
by Dr. Bert Rosenbloom
A: Over the past three decades, the A: Over the past three decades, the overwhelming emphasis in the overwhelming emphasis in the
Marketing Mix has been on:Marketing Mix has been on: Product Strategy Product Strategy with with
Pricing Strategy Pricing Strategy and and Promotional Strategy Promotional Strategy
also being stressed.also being stressed.
But.....But.....
Marketing Channel Strategy Marketing Channel Strategy (Place); the fourth “P” in the (Place); the fourth “P” in the
Marketing Mix hasMarketing Mix hasbeen largely neglectedbeen largely neglected
But this is changing....But this is changing....
Marketing Channel Strategy is Marketing Channel Strategy is Growing in Importance. Why?Growing in Importance. Why?
Five ReasonsFive Reasons
(1) (1) Search for Sustainable Competitive Search for Sustainable Competitive AdvantageAdvantage
(2) (2) Growing Power of Retailers in Marketing Growing Power of Retailers in Marketing ChannelsChannels
(3) (3) The Need to Reduce Distribution CostsThe Need to Reduce Distribution Costs
(4) (4) The Increased Role and Power of TechnologyThe Increased Role and Power of Technology
(5) (5) The New Stress on GrowthThe New Stress on Growth
I. The Search for Sustainable I. The Search for Sustainable Competitive AdvantageCompetitive Advantage
Sustainable Competitive Sustainable Competitive Advantage:Advantage:
A competitive advantage that A competitive advantage that cannot be quickly and easily cannot be quickly and easily
copied by competitorscopied by competitors
A sustainable competitive A sustainable competitive advantage is becoming more advantage is becoming more
difficult to attain through:difficult to attain through:� Product StrategyProduct Strategy- rapid technology transfer rapid technology transfer
enables competitors to quickly produce similar enables competitors to quickly produce similar productsproducts
� Pricing StrategyPricing Strategy- global economy allows global economy allows competitors to find low cost production to match competitors to find low cost production to match pricesprices
� Promotion StrategyPromotion Strategy- high cost, clutter, and short high cost, clutter, and short life promotional campaigns limit competitive life promotional campaigns limit competitive advantageadvantage
Competitive Advantage Based Competitive Advantage Based on on
Superior Marketing Channel Superior Marketing Channel Strategy is More Difficult for Strategy is More Difficult for
Competitors to Copy Competitors to Copy Because:Because:
� Channel Strategy is Long TermChannel Strategy is Long Term� Requires a Channel StructureRequires a Channel Structure� Depends on Relationships and PeopleDepends on Relationships and People� Requires Effective Interorganizational Requires Effective Interorganizational
Management Management
II. Growing Power of Retailers II. Growing Power of Retailers in Marketing Channelsin Marketing Channels
RetailersRetailers
Retailers....Retailers....
� Are Growing LargerAre Growing Larger� Enjoy Substantial Channel PowerEnjoy Substantial Channel Power� Act as Buying Agents for Customers Rather Act as Buying Agents for Customers Rather
than Selling Agents for Suppliersthan Selling Agents for Suppliers� Often Operate on Low Price / Low Margin Often Operate on Low Price / Low Margin
ModelModel� Operate in Saturated Markets and Fight for Operate in Saturated Markets and Fight for
Market Share Market Share
77.6% 22.4%
Top 50Rest
Concentration of Sales Among theConcentration of Sales Among theTop 50 Retail FirmsTop 50 Retail Firms
69%
31%
56%
44%
79%
21%
55%
45%
58%
42%FourLargestFirms
All OtherFirms
65%
36%
Kinds of Retailers Where Largest Four Firms Kinds of Retailers Where Largest Four Firms Account for At Least 50% of Total SalesAccount for At Least 50% of Total Sales
Conventional Conventional Department StoresDepartment Stores
DiscountDiscountMass MerchandisersMass Merchandisers
Variety StoresVariety Stores
Misc. GeneralMisc. GeneralMerchandisersMerchandisers
Athletic FootwearAthletic Footwear Toy StoresToy Stores
62.8
7.01.8 1.6
83.5
14.615.613.1
$10,000,000or more
$5,000,000 to$9,999,999
$1,000,000 to$4,999,999
Less than$1,000,000
Sales as a percentage ofthe total
Firms as a percentageof the total
Percentage Distribution of Retail Firms and SalesPercentage Distribution of Retail Firms and Salesby Size of Firmsby Size of Firms
� Retailers Act as Buying Agents for Retailers Act as Buying Agents for Customers Rather than as Selling Customers Rather than as Selling Agents for SuppliersAgents for Suppliers
� Retailers Often Operate on Low Retailers Often Operate on Low Price / Low Price / Low Margin ModelMargin Model
� Retailers Operate in Saturated Retailers Operate in Saturated Markets and Fight for Market Markets and Fight for Market ShareShare
Power or Dominant Retailers are Power or Dominant Retailers are therefore the therefore the “Gatekeepers” “Gatekeepers” into into
the Consumer Marketplacethe Consumer Marketplace
Thus, Effective Channel Strategy Thus, Effective Channel Strategy for Dealing with for Dealing with
Power Retailers is CrucialPower Retailers is Crucial
III. The Need to Reduce III. The Need to Reduce Distribution CostsDistribution Costs
DistributionDistributionCostsCosts
Distribution Costs Often Account Distribution Costs Often Account for a Significant Percentage of the for a Significant Percentage of the
Final Price of ProductsFinal Price of Products
Sometimes Distribution Costs Sometimes Distribution Costs are are Higher Higher than the Manufacturing than the Manufacturing
Cost or the Costs of Raw Cost or the Costs of Raw Materials and Component PartsMaterials and Component Parts
Some Examples...Some Examples...
Autos Autos SoftwareSoftware GasolineGasoline Fax MachinesFax Machines Packaged FoodsPackaged Foods
DistributionDistribution
ManufacturingManufacturing
Raw MaterialsRaw Materialsandand
ComponentsComponents
15%15%
40%40%
45%45%
25%25%
65%65%
10%10%
28%28%
19%19%
53%53%
30%30%
30%30%
40%40%
41%41%
33%33%
26%26%
While terms such as “restructuring”, While terms such as “restructuring”, “flattening out”, “downsizing”, and “flattening out”, “downsizing”, and
“rightsizing” have usually been “rightsizing” have usually been mentioned in the context of mentioned in the context of
corporate organizations, they also corporate organizations, they also apply to Marketing Channels. apply to Marketing Channels.
The latest term.... The latest term....
DisintermediationDisintermediation
Technology has the power to Technology has the power to greatly enhance the greatly enhance the
effectiveness and efficiency of effectiveness and efficiency of Marketing Channels and could Marketing Channels and could potentially change the entire potentially change the entire
structure of distribution around structure of distribution around the world.the world.
Some Examples...Some Examples...
� The InternetThe Internet� Wireless CommunicationsWireless Communications� B2C and B2B E-CommerceB2C and B2B E-Commerce� Cell PhonesCell Phones� Global TelecommunicationsGlobal Telecommunications� Robotics & Automated WarehousingRobotics & Automated Warehousing� Computerized “Salespeople”Computerized “Salespeople”
Firms that make effective use of Firms that make effective use of these technologies in their channel these technologies in their channel
strategy can gain a strategy can gain a substantialsubstantial competitive advantagecompetitive advantage
CompetitionCompetition
In American Business Circles In American Business Circles “Growth” “Growth” has Overtaken has Overtaken
“Restructuring” as the #1 Buzzword “Restructuring” as the #1 Buzzword
OutOutReengineeringReengineering
RestructuringRestructuring
DownsizingDownsizing
Flat OrganizationsFlat Organizations
Lean and MeanLean and Mean
In In GrowthGrowth
ExpansionExpansion
New MarketsNew Markets
Market ShareMarket Share
Top Line RevenueTop Line Revenue
QUESTIONQUESTION
In a relatively slow growth In a relatively slow growth economy, how can an individual economy, how can an individual
company selling mature products in company selling mature products in mature markets grow?mature markets grow?
ANSWERANSWER
Share of Mind = Share of MarketShare of Mind = Share of Market
TranslationTranslation
By getting channel members to focus on yourBy getting channel members to focus on yourproducts to a greater extent than yourproducts to a greater extent than your
competitors, you gain market share and competitors, you gain market share and growthgrowth
SummarySummary
(1) (1) Search For Competitive AdvantageSearch For Competitive Advantage
(2) (2) Growing Size and Power of Growing Size and Power of
RetailersRetailers
(3) (3) Need to Reduce Distribution CostsNeed to Reduce Distribution Costs
(4) (4) Power and Potential of TechnologyPower and Potential of Technology
(5) (5) Stress on Growth Instead of Stress on Growth Instead of
Downsizing Downsizing
Bottom LineBottom Line
Marketing Channel Strategy Has Marketing Channel Strategy Has Become Critically Important Become Critically Important
For Most BusinessesFor Most Businesses
Channel StrategyChannel Strategy
The broad principles by which a The broad principles by which a firm expects to achieve its firm expects to achieve its distribution objectives for distribution objectives for
satisfying its customerssatisfying its customers
Basic Strategic QuestionsBasic Strategic Questions
(1) (1) What role should distribution play in the firm’s What role should distribution play in the firm’s overall objectives and strategies? overall objectives and strategies?
(2) (2) What role should distribution play in the What role should distribution play in the marketing mix?marketing mix?
(3) (3) How should the firm’s marketing channels be How should the firm’s marketing channels be designed to achieve its distribution objectives?designed to achieve its distribution objectives?
(4) (4) What kinds of channel members should be What kinds of channel members should be selected to meet the firm’s distribution objectives?selected to meet the firm’s distribution objectives?
(5) (5) How can the marketing channel be managed to How can the marketing channel be managed to implement the firm’s channel design effectively and implement the firm’s channel design effectively and efficiently on a continuing basis?efficiently on a continuing basis?
The Relationship between customer The Relationship between customer satisfaction and the company’s satisfaction and the company’s
marketing mix can be represented as:marketing mix can be represented as:
CCss = f (P = f (P11, P, P22, P, P33, P, P44))
where:where:
CCss= degree of customer satisfaction= degree of customer satisfaction
PP11= product strategy= product strategy
PP22= pricing strategy= pricing strategy
PP33= promotional strategy= promotional strategy
PP44= place (channel strategy)= place (channel strategy)
Distribution Channel Strategy should Distribution Channel Strategy should receive especially heavy emphasis if one or receive especially heavy emphasis if one or
more of the following conditions prevails:more of the following conditions prevails:
� Distribution appears to be the most relevant Distribution appears to be the most relevant variable for satisfying customersvariable for satisfying customers
� Parity exists among competitors in the other Parity exists among competitors in the other three marketing mix variablesthree marketing mix variables
� High degree of vulnerability exists because of High degree of vulnerability exists because of competitors’ neglect of distributioncompetitors’ neglect of distribution
� Distribution channel strategy can foster Distribution channel strategy can foster synergiessynergies
Classic Marketing Channel Classic Marketing Channel Strategies Still Relevant TodayStrategies Still Relevant Today� Dual DistributionDual Distribution� Exclusive DealingExclusive Dealing� Full-Line ForcingFull-Line Forcing� Price DifferentiationPrice Differentiation� Price MaintenancePrice Maintenance� Refusal to DealRefusal to Deal� Resale RestrictionsResale Restrictions� Tying AgreementsTying Agreements
The Most Basic Questions in the The Most Basic Questions in the Design of Marketing ChannelsDesign of Marketing Channels
� When Do Customers Buy?When Do Customers Buy?� Where Do Customers Buy?Where Do Customers Buy?� How Do Customers Buy?How Do Customers Buy?� Who Buys?Who Buys?
Who makes the actual purchase?Who makes the actual purchase?
Who uses the product?Who uses the product?
Who takes part in the buying decision?Who takes part in the buying decision?
QUESTIONQUESTION
Is this just another “buzzword” Is this just another “buzzword” for logistics - getting the right for logistics - getting the right
product in the right quantity, at product in the right quantity, at the right time and right place?the right time and right place?
ORORIs there something more Is there something more substantive to this term?substantive to this term?
ANSWERANSWER
There There isis something more than something more than semantics here:semantics here:
Supply Chain Management takes a Supply Chain Management takes a broader perspective by viewing broader perspective by viewing
logistics as an integral part of the logistics as an integral part of the marketing channel marketing channel relationshiprelationship
Supply Chain Management Can Supply Chain Management Can Therefore be Defined as:Therefore be Defined as:
A long-term “partnership” among marketing A long-term “partnership” among marketing channel participants aimed at reducing channel participants aimed at reducing
inefficiencies, costs, and redundancies in the inefficiencies, costs, and redundancies in the logistical system in order to provide high levels logistical system in order to provide high levels
of customer serviceof customer service
Factor
Inventory ManagementInventory Management
Total Cost ApproachTotal Cost Approach
Time HorizonTime Horizon
Information Sharing and Information Sharing and
MonitoringMonitoring
Joint PlanningJoint Planning
Compatibility of CorporateCompatibility of Corporate
PhilosophiesPhilosophies
Channel LeadershipChannel Leadership
Sharing of Risks andSharing of Risks and
RewardsRewards
Inventory FlowInventory Flow
Traditional
Logistics SystemLogistics System
Independent EffortIndependent Effort
Minimize Firm CostsMinimize Firm Costs
Short-TermShort-Term
Limited to Needs ofLimited to Needs of
Current TransactionCurrent Transaction
Transaction BasedTransaction Based
Not RelevantNot Relevant
Not NeededNot Needed
Each Channel MemberEach Channel Member
on Their Ownon Their Own
““Warehouse” MentalityWarehouse” Mentality
Storage Safety StocksStorage Safety Stocks
Supply Chain Mgmt. System
Joint Effort to ReduceJoint Effort to Reduce
Channel InventoriesChannel Inventories
Channel-Wide Cost EfficienciesChannel-Wide Cost Efficiencies
Long-TermLong-Term
Continuous Effort toContinuous Effort to
Gather and MonitorGather and Monitor
OngoingOngoing
Important for Major InitiativesImportant for Major Initiatives
Required for Required for
Coordination and FocusCoordination and Focus
Risks and Rewards SharedRisks and Rewards Shared
over Long-rangeover Long-range
““Distribution Center”Distribution Center”
Orientation-JIT, Quick Orientation-JIT, Quick
Response, Cross DockingResponse, Cross Docking
Contrasts Between a Traditional Logistics System and Supply Chain Based SystemContrasts Between a Traditional Logistics System and Supply Chain Based System
Common Issues in Supply Chain ManagementCommon Issues in Supply Chain Management
1. 1. Order Processing TimeOrder Processing Time
2. 2. Order Assembly TimeOrder Assembly Time
3. 3. Delivery TimeDelivery Time
4. 4. Inventory ReliabilityInventory Reliability
5. 5. Order Size ConstraintsOrder Size Constraints
6. 6. Consolidation StipulationConsolidation Stipulation
7. 7. Consistency of DeliveryConsistency of Delivery
8. 8. Frequency of Sales VisitsFrequency of Sales Visits
9. 9. Ordering ConvenienceOrdering Convenience
10. 10. Order Progress InformationOrder Progress Information
11. 11. Inventory Backup During Inventory Backup During PromotionPromotion
12. 12. Invoice FormatsInvoice Formats
13. 13. Physical Condition of GoodsPhysical Condition of Goods
14. 14. Claims ResponseClaims Response
15. 15. Billing ProceduresBilling Procedures
16. 16. Average Order Cycle TimeAverage Order Cycle Time
17. 17. Order Cycle Time VariabilityOrder Cycle Time Variability
18. 18. Rush ServiceRush Service
19. 19. Product AvailabilityProduct Availability
20. 20. Competent Technical RepsCompetent Technical Reps
21. 21. Equipment DemonstrationsEquipment Demonstrations
22. 22. Availability of LiteratureAvailability of Literature
23. 23. Accuracy in Filling OrdersAccuracy in Filling Orders
24. 24. Terms of SaleTerms of Sale
25. 25. Protective PackagingProtective Packaging
26. 26. Degree of CooperationDegree of Cooperation
Strategic Alliances and Strategic Alliances and Partnerships in Marketing Partnerships in Marketing
ChannelsChannels
Definition:Definition:
Continuing and mutually supportive Continuing and mutually supportive relationship between the manufacturer and relationship between the manufacturer and its channel members in an effort to provide its channel members in an effort to provide
a more highly motivated team, network, a more highly motivated team, network, and alliance of channel partnersand alliance of channel partners
Traditional “us-against-them” Traditional “us-against-them” mentality is replaced with a new mentality is replaced with a new
cooperative perception of “us” in cooperative perception of “us” in an effective channel partnership an effective channel partnership
or strategic allianceor strategic alliance
Thus, partnerships or strategic Thus, partnerships or strategic alliances go well beyond the ad-alliances go well beyond the ad-
hoc, on-again / off-again hoc, on-again / off-again interactions typical of traditional interactions typical of traditional
relationships among channel relationships among channel membersmembers
Requirements for Partnerships or Requirements for Partnerships or Strategic Alliances in Marketing Strategic Alliances in Marketing
ChannelsChannels(1) (1) Recognition of interdependence of channel Recognition of interdependence of channel
membersmembers
(2) (2) Close cooperation between channel membersClose cooperation between channel members
(3) (3) Careful specification of roles, rights, and Careful specification of roles, rights, and responsibilities in the relationshipresponsibilities in the relationship
(4) (4) Coordinated effort focused on common goalsCoordinated effort focused on common goals
(5) (5) Good communications and trust between Good communications and trust between channel memberschannel members
Relationship MarketingRelationship Marketing
The practice of building long-term relations The practice of building long-term relations with key parties - customers, suppliers, with key parties - customers, suppliers,
distributors- in order to retain their long-distributors- in order to retain their long-term preference and businessterm preference and business
Because of the importance of channels of Because of the importance of channels of distribution, building good relationships in distribution, building good relationships in the marketing channel is key to successful the marketing channel is key to successful
relationship marketingrelationship marketing
Building Relationships with Channel Building Relationships with Channel MembersMembers
� Find Out the Needs and Problems of Channel Find Out the Needs and Problems of Channel MembersMembers
-informal information system (“grapevine”)-informal information system (“grapevine”)
-research studies of channel members-research studies of channel members
-research studies by outside parties-research studies by outside parties
-marketing channel audit-marketing channel audit
-distributor advisory councils-distributor advisory councils
� Offer Support to Channel Members that Offer Support to Channel Members that is Consistent with Their Needs and Helps is Consistent with Their Needs and Helps Solve their ProblemsSolve their Problems
-cooperative arrangements-cooperative arrangements
-partnerships and strategic alliances-partnerships and strategic alliances
-distribution programming-distribution programming� Provide Leadership to Motivate Channel Provide Leadership to Motivate Channel
Members Members
-use power effectively-use power effectively
-recognize causes of conflict-recognize causes of conflict
-resolve conflicts-resolve conflicts
Bases of Power in the Marketing Bases of Power in the Marketing ChannelChannel
� Reward PowerReward Power� Coercive PowerCoercive Power� Legitimate PowerLegitimate Power� Referent PowerReferent Power� Expert PowerExpert Power
Effective Channel Management Depends Effective Channel Management Depends on How Well These Power Bases are on How Well These Power Bases are
Combined and UsedCombined and Used
Causes of Marketing Channel Causes of Marketing Channel ConflictConflict
� Role IncongruitiesRole Incongruities� Resource ScarcitiesResource Scarcities� Perceptual DivergenciesPerceptual Divergencies� Expectational DifferencesExpectational Differences� Decision Domain DisagreementsDecision Domain Disagreements� Goal IncompatabilitiesGoal Incompatabilities� Communication DifficultiesCommunication Difficulties
Ten Trends in Marketing Channels Ten Trends in Marketing Channels as We Move into the Next Millenniumas We Move into the Next Millennium
1. 1. Growing Emphasis on Marketing Channel Growing Emphasis on Marketing Channel Strategy Strategy
2. 2. More and More Stress on TechnologyMore and More Stress on Technology
3. 3. Focus on Efficiency and Reducing Distribution Focus on Efficiency and Reducing Distribution Costs Costs
4. 4. Shortening and Flattening of Distribution Shortening and Flattening of Distribution Channels (Disintermediation)Channels (Disintermediation)
5. 5. Development of New Types of Intermediaries Development of New Types of Intermediaries in Channels (Reintermediation)in Channels (Reintermediation)
Trends Continued...Trends Continued...
6. 6. Continued Growth in Partnerships and Continued Growth in Partnerships and Alliances (Relationship Marketing) Alliances (Relationship Marketing)
7. 7. Increasing Power for Retailers and Increasing Power for Retailers and Wholesalers (Gatekeepers)Wholesalers (Gatekeepers)
8. 8. Mergers and Acquisitions to Gain Mergers and Acquisitions to Gain Distribution CloutDistribution Clout
9. 9. Flexible and Focused Distribution to Match Flexible and Focused Distribution to Match Micro, Niche, and Database MarketingMicro, Niche, and Database Marketing
10. 10. Attention to the Behavioral Dimensions of Attention to the Behavioral Dimensions of Distribution to Augment Technology Distribution to Augment Technology
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