Chapter 6Chapter 6

Designing the Marketing Channel**

66Major Topics for Ch. 6

1. Channel Design Paradigm (7 steps)**2. Channel Goals**3. Properties of Channel Tasks

(Functions)**4. Three Dimensions of Channel Structure**5. Three Main Approaches for Choosing a

Channel Structure**6. Three Analysis Steps to Consider for

Selecting the Best Channel**

Channel DesignChannel Design

66Topic 1:

Decisions involving the development of new marketing channels either where none had

previously existed or to the modification of existing channels

Channel Design:

66Channel DesignChannel Design

1. A decision made by the marketer2. The creation or modification of

channels3. The active allocation of distribution

tasks in an attempt to develop an efficient structure*

4. The selection of channel members*5. A strategic tool for gaining a

differential advantage

Key points of the definition include:

66Who Engages in Channel Who Engages in Channel

Design?*Design?*

• Producers, manufacturers, serviceproviders, franchisors

• Look down the channel

toward the market

• Look up the channel

to secure suppliers

• Look both up and down

the channel

Firms(Manufacturers)

WholesalersRetailers

* Who is missing here?

66Channel Design Paradigm**Channel Design Paradigm**(Seven Step Process)(Seven Step Process)

1. Recognize the need forchannel design decision

1. Recognize the need forchannel design decision

7. Selectchannel members

7. Selectchannel members

5. Evaluaterelevant variables

5. Evaluaterelevant variables

6. Choose the “best”channel structure

6. Choose the “best”channel structure

2. Set & coordinatedistribution objectives

2. Set & coordinatedistribution objectives

3. Specifydistribution tasks

3. Specifydistribution tasks

4. Develop alternative channel structures*

4. Develop alternative channel structures*

66

Distribution Objectives (Goals)Distribution Objectives (Goals)Topic 2

Setting distribution objectives requires knowledge of which objectives & strategies may impinge on these distribution objectives.

Three Key Channel Goals*

• Efficiency: “no better alternative is available that is universally preferred”

• Control vs. Flexibility

Internal Cohesiveness vs. External Adaptiveness

• Learning and Knowledge

* Intermediate Goals

Distribution Channel Tasks Distribution Channel Tasks (Functions)(Functions)

66Topic 3

Outlining distribution tasks is specific and situationally dependent on the firm.

For example: Distribution tasks for a manufacturer of consumer products

differs from those for industrial products.

Distribution tasks are a function of the distribution objectives and the

types of firms involved.

=

Channel Tasks (Functions)* • This is a generic list of functions!• Major Channels Functions (Tasks)

• Physical Possession• Ownership• Promotion• Negotiation & Pricing• Financing• Risking• Order Processing• Payment Collection

Properties of Channel Tasks (Functions)**

• Usually performed better through specialization

• Can be shifted among channel members

• Invariably use someone’s resources*

• Key Question: Who can do the best job?

Matching! (channel functions with channel members)

Costs Associated with channel functions

• Physical Possession: Storage and delivery cost• Ownership: inventory carrying cost• Promotion: personal selling, advertising, sales promo, PR• Negotiation: time and legal cost• Financing: credit terms, terms and conditions of sale• Risk Taking: warranty, insurance, repair• Ordering: order-processing cost• Payment: collection, bad debt cost

13

Allocating Five Marketing Functions in an Automobile Channel*

Information Function

Promotion Function

Customer

Customer

Customer

Customer

Advertising Agency

Suppliers

Suppliers

Suppliers

Suppliers

Suppliers

Physical Function

Title Function

Payment Function

Customer

Transporters

Warehouses

Manufacturer

Transporters

Warehouses

Dealers Transporters

Manufacturer

Dealers

Banks Manufacturer

Banks

Dealers

Banks

Transporters

Warehouses Banks

Manufacturer

Transporters

Warehouses Banks

Dealers

Transporters Banks

Manufacturer

Advertising Agency

Dealers

Exhibit 3.1

©McGraw-Hill Companies, Inc. 2002

Role Classifications for Different Types of Wholesalers

WholesalerClassification

Take Physical

Possession

Take Title to

Goods

Negotiation Function Performed

Promotional Function Performed

Merchant Wholesaler

Manufacturer’s Sales

OrganizationAgents/Brokers

Commission Merchants

Yes Yes Yes Yes

No Yes Yes Yes

No No Yes Yes

Yes No Yes Yes Exhibit 2.3

66Three Key Dimensions of Three Key Dimensions of

Channel Structure*Channel Structure*

Topic 4

2. Number of levels in the channel

1. Intensity at the various levels

3. Types ofintermediariesat each level

Allocation Alternatives

16

The Elements of Channel Design**

• Three Dimensions of Design Variation:

– Number of intermediaries at each level. Channel Intensity Issue

– Number of levels in the channel. Channel Level Issue

– Types of intermediaries used at each level. Channel Ownership and Function issue

©McGraw-Hill Companies, Inc. 2002

661. Number of Channel Levels1. Number of Channel Levels

• Range from zero to five or more• Number of alternatives is limited• Limitations result from the following

factors:– Particular industry practices– Nature & size of the market– Availability of intermediaries

18

Consumer Channel Design

Producer

Zero-level

One-level

Two-level

Three-level

Consumer

Retailer

Retailer

Retailer

Wholesaler

Wholesaler Agent

Number of Levels

Exhibit 3.2

©McGraw-Hill Companies, Inc. 2002

19

Industrial Channel Design

Manufacturer

Zero-level

One-level

Two-level

Three-level

IndustrialUser

Industrial

Distributor

Manufacturer’s Representative

Number of Levels

Manufacturer’s Salesforce

Exhibit 3.2

©McGraw-Hill Companies, Inc. 2002

2. Intensity at the Various 2. Intensity at the Various Channel LevelsChannel Levels

66

Intensive Selective Exclusive

Many Few One

Intensity Dimension

Numbers of Intermediaries (retail level)

Relationship between the intensity of distribution dimension & number of retail intermediaries used in a

given market area

663. Types of Channel 3. Types of Channel IntermediariesIntermediaries

• Numerous types*• Manager’s emphasis on types of

distribution tasks performed by these intermediaries

• Watch emerging types– Electronic online auction firms (eBay)– Industrial products sold in B2B markets (Chemdex, Converge.com)

22

Channel Ownership and Function:Types of Intermediaries

• Manufacturer’s own sales force (direct)

• Online channel (direct)

• Manufacturer’s representatives (indirect)

• Industrial distributors (indirect)©McGraw-Hill Companies, Inc. 2002

66Variables Affecting Channel Variables Affecting Channel

StructureStructure

1. Market Variables*2. Product Variables*3. Company Variables*4. Intermediary Variables5. Environmental Variables

Categories of Variables

66

Market Geography Location, geographical size, & distance from producer

Market Size Number of customers in amarket

Market Density Number of buying units (consumers or industrial

firms)per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy

1. Market Variables1. Market Variables

2. Product Variables2. Product Variables66

• Bulk & Weight• Perishability• Unit Value• Degree of Standardization• Technical versus Nontechnical• Newness

3. Company Variables3. Company Variables 66

Size The range of options isrelative to a firm’s size

Financial The greater the capital, theCapacity lower the dependence on

intermediaries

Managerial Intermediaries are necessaryExpertise when managerial experience

is lacking

Objectives Marketing & objectives may& Strategies limit use of intermediaries

4. Intermediary Variables4. Intermediary Variables 66

Availability Availability of intermediariesinfluences channel structure.

Cost Cost is always a consideration inchannel structure.

Services Services that intermediaries offer are

closely related to the selection of channel

members.

665. Environmental Variables5. Environmental Variables

The impact of environmental forces isa common reason for making

channel design decisions.

EconomicSociocultural

Competitive

Technological Legal

29

How Do You Evaluate Alternative Channel Designs?*

• Channel Goals: Channel efficiency and effectiveness

– Expected sales and costs* value

– Control and required resources

– Flexibility

– Learning and Knowledge©McGraw-Hill Companies, Inc. 2002

30

Break-even Cost analysis: Company Sales Force (direct channel) and a Manufacturer’s

Sales Agency (indirect channel)

SalesCosts

Manufacturer’sSales Agency

CompanySales Force

Level of Sales

Se

Exhibit 3.3

©McGraw-Hill Companies, Inc. 2002

Sales volume

Sales Cost

Topic 5Three Approaches for Choosing Three Approaches for Choosing

a Channel Structurea Channel Structure

66

1.“Characteristics of Goods & Parallel Systems” Approach* (Table 6.2 on p. 207)

2.Transaction Cost Analysis Approach*3.Firm Capability-based Approach

“Characteristics of Goods & Parallel Systems” Approach*

66

Characteristic Red Goods Orange Goods Yellow Goods

Replacement

Rate

High Medium Low

Gross Margin Low Medium High

Adjustment Low Medium High

Time of Consumption

Low Medium High

Searching Time Low Medium High

Ex) Yogurt Luxury Car

33

Transaction Cost Analysis (TCA)*• Focus: Acheiving Highest Economic Efficiency

• Costs occur whenever firms perform channel “functions”– Fixed and variable components.

• TCA states that firms should purse the most efficient channel arrangement based on cost avoidance.

– “Make” option = Direct channel

– “Buy” option = Indirect channel

34

The Continuum of Interfirm Exchange Format*

Hierarchy(Make)

Franchise Systems

BuyingGroups

Market Setting(Buy)

* My latest thought on continuum

35

Key Assumptions and Dimensions of TCA**

• Channel members negotiate, monitor, and enforce exchange aspects by considering:

• Two assumptions– Bounded rationality– Opportunism

• Three transaction dimensions– Uncertainty (Internal and External)– Specificity of assets/resources– Frequency of transactions

Ex) Fashion Apparel (e.g., Nicole Miller)

36

Choosing Internal versus External Transactions*

• Conditions for choosing “Make” (Internal = Using Your own salesforce or shop) over “Buy” (external = Using independent distributor):

– A high level of environmental uncertainty should exist in the transaction cost assessment.

– The assets involved should be highly specialized and unique to the exchange process.

– The transaction should occur frequently.

• Examples: Sherwin-Williams; Curtis Mathes

• Third Breed: Clan Mechanism; Partial Integration

Firm Capability-based ApproachFirm Capability-based Approach66

A firm’s own capability to perform a function

V

Internalize the function!

IF

Outside suppliers’ capability

38

Three Steps To Take for Selecting the Best Channel Design*

1. Analyze Channel Objectives and Product Characteristics:

2. Analyze Desired Channel (Service) Output Utilities:

3. Analyze Market Behaviors and Segments

©McGraw-Hill Companies, Inc. 2002

Topic 6

39

1. Analyzing Channel Objectives and Product Characteristics

• Channel Objectives• Product Characteristics

– Unit value: length

– Standardization: length, intensity

– Bulkiness: length

– Complexity: length, intensity

– Stage of Product Life Cycle: intensity, ownership

Implications for level, intensity, and ownership and function

©McGraw-Hill Companies, Inc. 2002

40

3. Analyzing Market Behaviors and Segments

• Current and potential buyer behaviors:

– Who is doing the buying?

• Where,when and how end users buy:

– Seasonal

– Shopping from home

• Knowledge of industry (and its language)

©McGraw-Hill Companies, Inc. 2002

41

2. Analyzing Desired Channel Output Utilities

• Lot size utility

• Convenience (time/spatial) utility

• Assortment/Variety Utility

• Service utility

©McGraw-Hill Companies, Inc. 2002