Dr. Saleh Alqahtani

Chapter 17 Chapter 17 Designing and Managing Designing and Managing Value Networks and Value Networks and Marketing ChannelsMarketing Channelsbyby

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Establish channels for different target markets and aim for efficiency, control, and adaptability.

Kotler on Marketing

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In this chapter, we focus on the following In this chapter, we focus on the following channel questions from the viewpoint of the channel questions from the viewpoint of the manufacturers:manufacturers: What is the value network and marketing What is the value network and marketing

channel system?channel system? What work is performed by marketing What work is performed by marketing

channels?channels? What decisions do companies face in What decisions do companies face in

designing, managing, evaluating, and designing, managing, evaluating, and modifying their channels? modifying their channels?

What trends are taking place in channel What trends are taking place in channel dynamics?dynamics?

How can channel conflict be managed?How can channel conflict be managed?

Chapter Objectives

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What is a Value Network and Marketing-Channel System?

Value NetworkValue NetworkMarketing channelMarketing channel

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What is a Value Network and Marketing-Channel System?

Channel integration characteristics:Channel integration characteristics: Ability to order a product online, and Ability to order a product online, and

pick it up at a convenient retail pick it up at a convenient retail locationlocation

Ability to return an online-ordered Ability to return an online-ordered product to a nearby storeproduct to a nearby store

Right to receive discounts based on Right to receive discounts based on total of online and off-line purchasestotal of online and off-line purchases

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How a Distributor Reduces theHow a Distributor Reduces theNumber of Channel TransactionsNumber of Channel Transactions

= Distributor= Distributor= Customer= Customer= Manufacturer= Manufacturer

B. Number of contacts B. Number of contacts with a distributorwith a distributorM x C = 3 + 3 = 6M x C = 3 + 3 = 6

Store

11

22

33

44

55

66

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Distribution Channel Functions

Distribution Channel Functions

OrderingOrdering

PaymentsPayments

CommunicationCommunicationTransferTransfer

NegotiationNegotiation

FinancingFinancingRisk TakingRisk Taking

PhysicalDistribution

PhysicalDistribution

InformationInformation

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What Work is Performed by Marketing Channels?

Acquire funds to finance inventories at different Acquire funds to finance inventories at different levels in the marketing channellevels in the marketing channel

Assume risk connected with Assume risk connected with carrying out channel workcarrying out channel work

Provide for the successive storage Provide for the successive storage and movement of physical productsand movement of physical products

Provide for buyers’ payment of their bills Provide for buyers’ payment of their bills through banks and other financial institutionsthrough banks and other financial institutions

Oversee actual transfer of ownership from one Oversee actual transfer of ownership from one organization or person to anotherorganization or person to another

Dr. Saleh Alqahtani

Channel-Design Decisions Push strategyPush strategy Pull strategyPull strategy

Designing a channel system Designing a channel system involves four steps:involves four steps: Analyzing customer needsAnalyzing customer needs Establishing channel objectivesEstablishing channel objectives Identifying major channel alternativesIdentifying major channel alternatives Evaluating major channel alternativesEvaluating major channel alternatives

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Consumer Marketing ChannelsConsumer Marketing ChannelsConsumer Marketing ChannelsConsumer Marketing Channels

WholesalerWholesaler JobberJobber RetailerRetailer ConsumerConsumer

ConsumerConsumer

RetailerRetailer ConsumerConsumer

ManufacturerManufacturer

0-level channel

WholesalerWholesaler RetailerRetailer ConsumerConsumer MfgMfg

2-level channel

MfgMfg

3-level channel

1-level channel

ManufacturerManufacturer

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Industrialdistributors

Man

ufa

ctu

rer

Co

nsu

mer

Manufacturer’srepresentative

Manufacturer’ssales branch

Industrial Marketing Channels

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Channel-Design Decisions

Analyze Customers’ Desired Analyze Customers’ Desired Service Output LevelsService Output Levels Lot sizeLot size Waiting timeWaiting time Spatial convenienceSpatial convenience Product varietyProduct variety Service backupService backup

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Channel-Design Decisions

Establish Objectives and ConstraintsEstablish Objectives and Constraints Identify Major Channel AlternativesIdentify Major Channel Alternatives

Types of IntermediariesTypes of Intermediaries Number of IntermediariesNumber of Intermediaries

Exclusive distributionExclusive distribution Exclusive dealingExclusive dealing

Selective distributionSelective distribution Intensive distributionIntensive distribution

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Channel-Design Decisions

Terms and Responsibilities of Terms and Responsibilities of Channel MembersChannel Members Price policyPrice policy Conditions of saleConditions of sale Distributors’ territorial rightsDistributors’ territorial rights

Evaluate the Major AlternativesEvaluate the Major Alternatives Economic CriteriaEconomic Criteria

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Figure 17.4: The Value-Adds versus Costs of Different Channels

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SellingSellingcostscosts

(dollars)(dollars)

Level of sales (dollars)Level of sales (dollars)

Break-Even Cost Chart

CompanyCompanysales forcesales force

Manufacturer’s Manufacturer’s sales agencysales agency

SSBB

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Channel Management DecisionsChannel Management Decisions

SelectingSelecting

FE

ED

BA

CK

MotivatingMotivating

TrainingTraining

EvaluatingEvaluating

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Types of Vertical Marketing SystemsTypes of Vertical Marketing Systems

CorporateCommon Ownership at Different

Levels of the Channel

CorporateCommon Ownership at Different

Levels of the Channel

ContractualContractual Agreement Among

Channel Members

ContractualContractual Agreement Among

Channel Members

AdministeredLeadership is Assumed by One or

a Few Dominant Members

AdministeredLeadership is Assumed by One or

a Few Dominant Members

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Conventional Distribution Channel vs. Vertical Marketing Systems

VerticalVerticalmarketingmarketingchannelchannel

Manufacturer

Retailer

ConventionalConventionalmarketingmarketingchannelchannel

Consumer

Manufacturer

Consumer

Retailer

Wholesaler

Wh

ole

sale

r

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Channel Dynamics Conflict, Cooperation, and CompetitionConflict, Cooperation, and Competition

Types of Conflict and CompetitionTypes of Conflict and Competition Vertical channel conflictVertical channel conflict Horizontal channel conflictHorizontal channel conflict Multichannel conflictMultichannel conflict

Causes of Channel ConflictCauses of Channel Conflict Goal incompatibilityGoal incompatibility Unclear roles and rightsUnclear roles and rights

Differences in perceptionDifferences in perception

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Channel Dynamics

By adding new channels, a company faces By adding new channels, a company faces the possibility of channel conflict which the possibility of channel conflict which may include:may include: Conflict between the national account Conflict between the national account

managers and field sales forcemanagers and field sales force Conflict between the field sales Conflict between the field sales

force and the telemarketersforce and the telemarketers Conflict between the field sales Conflict between the field sales

force and the dealersforce and the dealers

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Channel Dynamics

Managing Channel ConflictManaging Channel Conflict DiplomacyDiplomacy MediationMediation ArbitrationArbitration

Legal and Ethical Issues Legal and Ethical Issues in Channel Distributionin Channel Distribution

Exclusive distributionExclusive distribution Exclusive dealingExclusive dealing Tying agreementsTying agreements

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Chapter 18 Chapter 18 Managing Retailing, Managing Retailing, Wholesaling, and Market Wholesaling, and Market LogisticsLogisticsbyby

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Successful “go-to-market” strategies require integrating retailers, wholesalers, and logistical organizations.

Kotler on Marketing

Dr. Saleh Alqahtani

Chapter Objectives In this chapter, we focus on the following In this chapter, we focus on the following

questions about each marketing questions about each marketing intermediary:intermediary: What major types of organizations What major types of organizations

occupy this sector?occupy this sector? What marketing decisions do What marketing decisions do

organizations in this sector make?organizations in this sector make? What are the major trends in this sector?What are the major trends in this sector?

Dr. Saleh Alqahtani

Table 18.1: Major Retailer Types

Specialty Store: Specialty Store: Narrow product line with a deep assortment. A clothing store Narrow product line with a deep assortment. A clothing store would be a would be a single-linesingle-line store; a men’s clothing store would be a store; a men’s clothing store would be a limited-linelimited-line store; and a men’s custom-shirt store would be a store; and a men’s custom-shirt store would be a superspecialtysuperspecialty store. store. Examples: Athlete’s Foot, Tall Men, The Limited, The Body Shop.Examples: Athlete’s Foot, Tall Men, The Limited, The Body Shop.

Department Store: Department Store: Several product lines—typically clothing, home Several product lines—typically clothing, home furnishings, and household goods—with each line operated as a separate furnishings, and household goods—with each line operated as a separate department managed by specialist buyers or merchandisers. department managed by specialist buyers or merchandisers. ExamplesExamples: : Sears, JCPenney, Nordstrom, Bloomingdale’s.Sears, JCPenney, Nordstrom, Bloomingdale’s.

Supermarket: Supermarket: Relatively large, low-cost, low-margin, high volume, self-Relatively large, low-cost, low-margin, high volume, self-service operation designed to serve total needs for food, laundry, and service operation designed to serve total needs for food, laundry, and household products. household products. ExamplesExamples: Kroger, Food Emporium, Jewel.: Kroger, Food Emporium, Jewel.

Convenience Store: Convenience Store: Relatively small store located near residential area, Relatively small store located near residential area, open long hours, seven days a week, and carrying a limited line of high-open long hours, seven days a week, and carrying a limited line of high-turnover convenience products at slightly higher prices, plus takeout turnover convenience products at slightly higher prices, plus takeout sandwiches, coffee, soft drinks. sandwiches, coffee, soft drinks. ExamplesExamples: 7-Eleven, Circle K.: 7-Eleven, Circle K.

See text for complete table

Dr. Saleh Alqahtani

Retailing

Levels of ServiceLevels of Service Wheel-of-retailingWheel-of-retailing Four levels of service:Four levels of service:

Self-serviceSelf-service Self-selectionSelf-selection Limited serviceLimited service Full serviceFull service

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Retail Positioning Map

Bloomingdale’s

KinneyShoe

Wal-Mart

Tiffany

BroadBroad

NarrowNarrow

Bre

adth

of

pro

du

ct li

ne

Value addedLowLowHighHigh

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Classification Of Retailer TypesClassification Of Retailer Types

Specialty StoresSpecialty Stores

Department StoresDepartment Stores

SupermarketsSupermarkets

Convenience StoresConvenience Stores

Off-Price RetailerOff-Price Retailer

SuperstoresSuperstores

Catalog ShowroomCatalog Showroom

Wide Variety of Product Lines i.e. Clothing, Home Furnishings, & Household Items

Wide Variety of Product Lines i.e. Clothing, Home Furnishings, & Household Items

Wide Variety of Food, Laundry, & Household Products

Wide Variety of Food, Laundry, & Household Products

Limited Line of High-Turnover Convenience Goods

Limited Line of High-Turnover Convenience Goods

Inexpensive, Overruns, Irregulars, and Leftover Goods

Inexpensive, Overruns, Irregulars, and Leftover Goods

Large Assortment of Routinely Purchased Food & Nonfood Products, Plus Services

Large Assortment of Routinely Purchased Food & Nonfood Products, Plus Services

Broad Selection, Fast Turnover, Discount Prices

Broad Selection, Fast Turnover, Discount Prices

Narrow Product Line, Deep AssortmentNarrow Product Line, Deep Assortment

Store Type Length and Breadth of Product Assortment

Discount StoresDiscount Stores Broad Product Line, Low Margin, High Volume

Broad Product Line, Low Margin, High Volume

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Types of NonStore RetailingTypes of NonStore Retailing

Direct SellingDirect Selling

Direct MarketingDirect Marketing

Buying ServicesBuying Services

NonStore Retailing Accounts for More

Than 12% of All Consumer

Purchases, and is trending up.

Automatic VendingAutomatic Vending

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Low PriceLow StatusLow Margin

Mid PriceMid StatusMid Margin

High PriceHigh StatusHigh Margin

Wheel of RetailingWheel of Retailing

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Why are Wholesalers Used?Why are Wholesalers Used?

WholesalerFunctions

ManagementServices & Advice

ManagementServices & Advice

Selling andPromoting

Selling andPromoting

MarketInformation

MarketInformation

Buying andAssortment Building

Buying andAssortment Building

Risk BearingRisk Bearing Bulk BreakingBulk Breaking

TransportingTransporting

FinancingFinancing WarehousingWarehousing

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Table 18.3: Major Wholesaler Types

Merchant WholesalersMerchant Wholesalers: Independently owned businesses that : Independently owned businesses that take title to the merchandise they handle. They are called take title to the merchandise they handle. They are called jobbers, distributorsjobbers, distributors, or , or mill supply housesmill supply houses and fall into two and fall into two categories: full service and limited service.categories: full service and limited service.

Full-Service WholesalersFull-Service Wholesalers: : Carry stock, maintain a sales force, Carry stock, maintain a sales force, offer credit, make deliveries, and provide management offer credit, make deliveries, and provide management assistance. There are two types of full-service wholesalers: (1) assistance. There are two types of full-service wholesalers: (1) Wholesale merchants sell primarily to retailers and provide a full Wholesale merchants sell primarily to retailers and provide a full range of services. General-merchandise wholesalers carry range of services. General-merchandise wholesalers carry several merchandise lines. General-line wholesalers carry one or several merchandise lines. General-line wholesalers carry one or two lines. Specialty wholesalers carry only part of a line. (2) two lines. Specialty wholesalers carry only part of a line. (2) Industrial distributors sell to manufacturers rather than to Industrial distributors sell to manufacturers rather than to retailers and provide several services—carrying stock, offering retailers and provide several services—carrying stock, offering credit, and providing deliverycredit, and providing delivery..

See text for complete table

Dr. Saleh Alqahtani

Wholesaling Trends in WholesalingTrends in Wholesaling

Narus and Anderson identified four ways to Narus and Anderson identified four ways to strengthen relationships with manufacturersstrengthen relationships with manufacturers Sought clear agreement about their expected Sought clear agreement about their expected

function in the marketing channelfunction in the marketing channel Gained insight into the manufacturers’ Gained insight into the manufacturers’

requirements by visiting their plantsrequirements by visiting their plants Fulfilled commitments by Fulfilled commitments by

meeting volume targetsmeeting volume targets Identified and offered value-added Identified and offered value-added

services to help their suppliersservices to help their suppliers

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Goals of the Logistics SystemGoals of the Logistics System

• Provide a Targeted Level of Customer Service at the Least Cost.

• Maximize Profits, Not Sales.

Higher Distribution Costs/ Higher Customer Service Levels

Lower Distribution Costs/ Lower Customer Service Levels

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InventoryWhen to order

How much to orderJust-in-time

InventoryWhen to order

How much to orderJust-in-time

CostsMinimize Costs ofAttaining Logistics

Objectives

CostsMinimize Costs ofAttaining Logistics

Objectives

WarehousingStorage

Distribution

WarehousingStorage

Distribution

Order ProcessingSubmittedProcessed

Shipped

Order ProcessingSubmittedProcessed

Shipped

Logistics

FunctionsTransportation Water, Truck,

Rail, Pipeline & Air

Logistics Systems

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Market Logistics Supply chain management (SCM)Supply chain management (SCM) Value networkValue network Demand chain planningDemand chain planning Market logisticsMarket logistics

Market logistics planning has four steps:Market logistics planning has four steps: Deciding on the company’s value Deciding on the company’s value

proposition to its customersproposition to its customers Deciding on the best channel design and Deciding on the best channel design and

network strategy for reaching the customersnetwork strategy for reaching the customers Developing operational excellence in sales forecasting, Developing operational excellence in sales forecasting,

warehouse management, transportation management, warehouse management, transportation management, and materials managementand materials management

Implementing the solution with the best information Implementing the solution with the best information systems, equipment, policies, and proceduressystems, equipment, policies, and procedures

Integrated logistics systems (ILS)Integrated logistics systems (ILS)

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Figure 18.2: Determining Optimal Order Quantity

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RailNation’s largest carrier, cost-effective for shipping bulk products, piggyback

RailNation’s largest carrier, cost-effective for shipping bulk products, piggyback

TruckFlexible in routing & time schedules, efficient

for short-hauls of high value goods

TruckFlexible in routing & time schedules, efficient

for short-hauls of high value goods

WaterLow cost for shipping bulky, low-value

goods, slowest form

WaterLow cost for shipping bulky, low-value

goods, slowest form

PipelineShip petroleum, natural gas, and chemicals

from sources to markets

PipelineShip petroleum, natural gas, and chemicals

from sources to markets

AirHigh cost, ideal when speed is needed or to

ship high-value, low-bulk items

AirHigh cost, ideal when speed is needed or to

ship high-value, low-bulk items

Transportation Modes

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1. Speed.

2. Dependability.3. Capability.4. Availability.5. Cost.

Checklist for ChoosingTransportation Modes