Mma6e Chapter 15final 140924032545 Phpapp01

Marketing Management:
An Asian Perspective,
6th Edition
Instructor Supplements
Created by Geoffrey da Silva
Designing and Managing Marketing Channels and
Value Networks
3 Pearson Education South Asia Pte Ltd 2013. All rights reserved
15
Learning Issues for Chapter Fifteen
1. What is a marketing channel system and a value network?
2. What work marketing channels perform?
3. How should channels be designed?
4. What decisions companies face in managing their channels?
5. How companies should integrate channels and manage

channel conflict?
6. What are the key issues with e-commerce and m-commerce?
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.
Chapter Outline
Companies are looking at the suppliers suppliers upstream

and at the distributors customers downstream.
They are looking at customer segments and considering a

wide range of different possible means to sell, distribute, and
service their offerings.
Companies today must build and manage a continuously

evolving and increasingly complex channel system and 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.
These intermediaries constitute a marketing channel (also

called a trade channel or distribution channel).
Marketing channels are sets of interdependent

organizations involved in the process of making a product or
service available for use or consumption.
Marketing Channels and Value Networks
Some intermediaries buy, take title to, and resell the

merchandise; they are called merchants.
Others search for customers and may negotiate on the

producers behalf but do not take title to the goods; they are
called agents.
Still others assist in the distribution process but neither takes

title to goods nor negotiates purchases or sales; they are
called facilitators.
The Importance of Channels
A marketing channel system is the particular set of marketing

channels employed by a firm.
Decisions about the marketing channel system are among the

most critical facing management.
In the United States, channel members collectively earn

margins that account for 30 to 50 percent of the ultimate
selling price.
Marketing channels also represent a substantial opportunity

cost.
Converting potential buyers into profitable orders is one of

the chief roles of marketing channels.
Marketing channels must not simply serve markets, they

must also make markets.
The channels chosen affect all other marketing decisions:
1. The companys pricing depends on whether it uses mass-

merchandisers or high-quality boutiques.
2. The firms sales force and advertising decisions depend on how

much training and motivation dealers need.
3. In addition, channel decisions involve relatively long-term

commitments to other firms as well as a set of policies and
procedures.
Push and Pull Marketing Strategies
In managing its intermediaries, the firm must decide how much

effort to devote to push versus pull marketing.
Push Strategy
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.
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.
Pull Strategy
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.
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.
Hybrid Channels and Multichannel Marketing
Todays successful companies are also multiplying the number of

go-to-market or hybrid channels in any one market area.
Hybrid channels or multichannel marketing occurs when a single

firm uses two or more marketing channels to reach customer
segments.
In multichannel marketing, each channel targets a different

segment of buyers, or different need states for one buyer, and
delivers the right products in the right places in the right way at the
least cost. When this does not happen, there can be channel
conflict, excessive cost, or insufficient demand.
Hybrid Channels and Multichannel Marketing
Companies that manage hybrid channels must make sure

these channels work well together and match each target
customers preferred ways of doing business.
Customers expect channel integration, characterized by the

following features:
i. order a product online and pick it up at a convenient retail
location
ii. to return an online ordered product to a nearby store of the
retailer.
iii. receive discounts based on total online and off-line purchases.
Value Network
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.
This view has been called demand chain planning.
Value Network
An even broader view sees a company at the center of a

value networka system of partnerships and alliances that
a firm creates to source, augment, and deliver its offerings.
A value network includes a firms suppliers, its suppliers

suppliers, its immediate customers, and their end customers.
A company needs to orchestrate these parties to enable it to
deliver superior value to the target market.
Creating a Value Network in Order to Deliver
Superior Value to a Target Market
Apples Developer Connectionwhere people create iPhone apps and the likehas 50,000 members at different levels of
membership. Developers keep 70 percent of any revenue their products generate, and Apple gets 30 percent.
Demand Chain Planning
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.
The Role of Marketing Channels
Why would a producer

delegate some of the selling
jobs to intermediaries,
relinquishing control over
how and to whom the
products are sold?
The Role of Marketing Channels
Through their contacts, experience,

specialization, and scale of
operation, intermediaries make
goods widely available and
accessible to target markets,
usually offering the firm more
effectiveness and efficiency than it
can achieve on its own.
Many producers lack the financial

resources to carry out direct
marketing.
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.
Members of the marketing channel perform a number of key functions.

See Table 15.1.
Some functions constitute a forward flow of activity from the company to

the customer.
Other functions constitute a backward flow from customers to the

company.
Still others occur in both directions.
Table 15.1: Channel Member Functions
Online Stores Providing Time Utility
An online 7-Eleven with butler service was introduced in China. Consumers can order soft drinks and
instant noodles and have them delivered to their homes within an hour.
Channel Flows
Five flows are illustrated in Figure 15.1 for the marketing of

forklift trucks.
If these flows were superimposed in one diagram, the

tremendous complexity of even simple marketing channels
would be apparent.
Figure 15.1: Marketing Flows in the Marketing
Channel for Forklift Trucks
Types of Channels
A manufacturer selling a physical product and services might

require three channels:
1. A sales channel
2. A delivery channel
3. A service channel
Responsibility for Channel Functions
The question is not whether various channel functions need to

be performedthey must bebut rather, who is to perform
them.
All channel functions have three things in common:
i. they use up scarce resources;
ii. they can often be performed better through specialization; and
iii. they can be shifted among channel members.
Responsibility for Channel Functions
When the manufacturer shifts some functions to

intermediaries, the producers costs and prices are lower, but
the intermediary must add a charge to cover its work.
If the intermediaries are more efficient than the

manufacturer, prices to consumers should be lower.
If consumers perform some functions themselves, they

should enjoy even lower prices.
Channel Levels
The producer and the final customer are part of every

channel.
We will use the number of intermediary levels to designate

the length of a channel.
Figure 15.2(a) illustrates several consumer-goods marketing

channels of different lengths.
Figure 15.2 (a): Consumer Marketing Channels
Channel Levels in Consumer Markets
A zero-level channel (also called a direct-marketing channel)

consists of a manufacturer selling directly to the final consumer.
A one-level channel contains one selling intermediary such as a

retailer.
A two-level channel contains two intermediariesa wholesaler

and a retailer.
A three-level channel contains wholesalers, jobbers, and

retailers.
Industrial Marketing Channels
Figure 15.2(b) shows channels commonly used in industrial

marketing.
An industrial-goods manufacturer can use its sales force to sell

directly to industrial customers; or it can sell to industrial
distributors, who sell to the industrial customers; or it can sell
through manufacturers representatives or its own sales
branches directly to industrial customers, or indirectly to
industrial customers through industrial distributors.
Zero-, one-, and two-level marketing channels are quite

common.
Figure 15.2 (b): Industrial Marketing Channels
Reverse Flow Channels
Channels normally describe a forward movement of products from source

to user.
One can also talk about reverse-flow channels.
Reverse-flow channels are important in the following cases:

i. To reuse products or containers
ii. To refurbish products for resale
iii. To recycle products
iv. To dispose of products and packaging
Several intermediaries play a role in reverse-flow channels.
Service Sector Channels
As the Internet and other technologies advance, service

industries such as airlines, hospitality, banking, insurance,
stockbroking, and travel are operating through new channels.
For example, cross-selling opportunities have motivated

several mergers and acquisitions in the financial sector
worldwide.
Banks have bought stakes in insurance companies and

stockbroking houses to exploit their distribution channels and
maximize the merged companies products worldwide.
Channels for Person Marketing
Marketing channels also keep changing in person

marketing.
Besides live and programmed entertainment, entertainers,

musicians, and other artists can reach prospective and
existing fans online in many waysvia their own Web sites,
social community sites such as Facebook and Twitter, and
third-party Web sites.
Using the Social Media as a Channel
Even politicians, such as Minister Khaw Boon Wan from Singapore, use social networking sites and
blogs to update constituents on what is happening in the community.
Channel Design Decisions
To design a marketing channel system, marketers need to:
1. analyze customer needs,
2. establish channel objectives,
3. identify major channel alternatives, and
4. evaluate major channel alternatives.
Analyzing Customers Desired Service Output Levels
Consumers may choose the channels they prefer based on

price, product assortment, and convenience, as well as their
own shopping goals (economic, social, or experiential).
Even the same consumer may choose different channels for

different functions in a purchase.
Some consumers are willing to trade up or trade down.
The marketing-channel designer knows that providing greater

service output means increased channel costs and higher prices
for customers.
Channels Produce Five Service Outputs
1. Lot sizeThe number of units the channel permits a typical

customer to purchase on one occasion. Hindustan Unilever
targets lower-priced stores to sell its sachet-packaged
products because it found that Indian consumers prefer
buying smaller pouches of shampoo and detergent than
larger packaged ones.
2. Waiting and delivery timeThe average time customers of

that channel wait for receipt of the goods. Customers
increasingly prefer faster delivery channels.
3. Spatial convenienceThe degree to which the marketing

channel makes it easy for customers to purchase the
product. In the U.S., Toyota offers greater spatial
convenience than Lexus because there are more Toyota
dealers, helping customers save on transportation and
search costs in buying and repairing an automobile.
4. Product varietyThe assortment breadth provided by the

marketing channel. Normally, customers prefer a greater
assortment because more choices increase the chance of
finding what they need.
5. Service backupThe add-on services (credit, delivery,

installation, repairs) provided by the channel. The greater
the service backup, the greater the work provided by the
channel.
Establishing Objectives and Constraints
Marketers should state their channel objectives in terms of

targeted service output levels.
Channel institutions should arrange their functional tasks to

minimize total channel costs and still provide desired levels of
service outputs.
Planners can identify several market segments that want

different service levels.
Establishing Objectives and Constraints
Channel objectives vary with product characteristics.
Marketers must adapt their channel objectives to the larger

environment.
Channel design must take into account the strengths and

weaknesses of different types of intermediaries.
In entering new markets, firms often closely observe what

other firms are doing.
Decision to operate own stores: Apple
Apples channel objectives of

creating a dynamic retail
experience for consumers
was not being met by
existing channels, so it chose
to open its own stores.
Apple stores offer a unique

brand experience to Apple
enthusiasts and prospects.
Four Environmental Issues to Consider for Channels
in Asia
1. The underdevelopment of infrastructure in Asias larger
emerging markets. Consequently, a distribution channel
model based on developed-country experiences must be
modified to work in Asia. An infrastructure-related problem is
the scarcity of market research information to assist in
formulating distribution strategies.
in Asia
2. Economic factorsSome Western MNCs may be interested
in buying their regional distributors, switching partners
before their competitors, or bypassing their intermediaries.
Buying distributors make financial sense if Asian distributors
are cheap and attractive to purchase. Bypassing
intermediaries enables MNCs to move their goods to market
using shorter channels more quickly, ensuring that
acceptable marketing or service standards are maintained for
customer loyalty and brand image.
Economic Infrastructure and Impact on Distribution
In Asia, unregulated markets

and bazaars exist. This makes
tracking purchase patterns like
in the U.S. challenging.
in Asia
3. Legal regulations and restrictionsGovernment
regulations and practices can result in distribution difficulties.
Such laws have resulted in small-sized stores which has led
to many inefficiencies and high costs in the overall retail
structure.
4. Consumer lifestyle and population densityFor example

high population density markets like Hong Kong. Their
lifestyle was more suited to daily grocery shopping in a
neighborhood store that facilitated the stocking of small
quantities of household groceries for the family.
Impact of Local Country Laws on Retailing: Japan
Japanese Large Scale Retail

Store Law once inadvertently
encouraged small-sized stores
of less than 1,500 square
meters to be set up, resulting in
inefficiencies and high costs.
Impact of Environmental Changes in Asia on
Distribution Strategies of Companies
Given the dynamic nature of the Asian environment,
manufacturers should be keenly aware of changes that may
impact their distribution strategy.
Asian nations like China and South Korea have revised tax
laws and selectively liberalized their distribution industry to
allow foreign participation.
The entry of foreign retailers should upgrade the standards

of, and increase competition in, the distribution industry in
these countries.
Impact of Environmental Changes in Asia on
Distribution Strategies of Companies
The increased purchasing power of larger retail chains and
manufacturers development of their own distribution systems
to tap the growing Asian market are expected to diminish the
role of the wholesaler in the region.
As distributors begin to handle fewer product lines,

specialization will be more common, thus reducing the
potential for channel conflict.
Identifying and Evaluating Major Channel
Alternatives
Each channel has unique strengths as well as weaknesses.
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.
Companies should search for innovative marketing channels.
Sometimes a company chooses an unconventional channel

because of the difficulty, cost, or ineffectiveness of working
with the dominant channel.
The advantage is that the company will encounter less

competition during the initial move into this channel.
Unconventional ChannelAirAsia
With increased competition and rising costs, Malaysian low-cost

carrier AirAsia is the first airline in the world to offer a full booking
system via mobile phone.
Customers anywhere in the world can use their mobile phones to

access AirAsias Web pages directly and make flight bookings at any
time.
It hopes to win more customers who have mobile phones but may
not have easy access to the Internet.
This unconventional channel also reduces AirAsias operating costs by

cutting out travel agents and sales offices.
Trading Houses in Asia
Perhaps the most unique type of intermediary in Asia is the

trading house.
Asian nations have a higher dependency on export trade for

their survival.
These trading houses, called horizontal keiretsu in Japan and

hong in Hong Kong, function basically as matchmakers between
potential buyers and sellers.
Examples of trading houses are Japans Mitsubishi Corporation

and Hong Kongs Jardine Strategic.
Functions of Trading Houses
Trading houses provide both parties with negotiating opportunities and

participate in the negotiations as mediators, sometimes representing the
exporter, and other times, the importer.
The degree of assistance provided varies depending on exporter-

importer characteristics.
Less experienced importers are given more assistance than more

experienced ones by the importer-assisting section of the trading house.
Similarly, less experienced exporters are given more assistance than

more experienced ones by the exporter-assisting section of the trading
house.
Number of Intermediaries
Three strategies are available:
A. exclusive distribution,
B. selective distribution, and
C. Intensive distribution.
Exclusive Distribution
Exclusive distribution means severely limiting the number of

intermediaries.
It is used when the producer wants to maintain control over the service
level and outputs offered by the resellers.
Often it involves exclusive dealing arrangements.
By granting exclusive distribution, the producer hopes to obtain more

dedicated and knowledgeable selling.
It requires greater partnership between seller and reseller and is used in

the distribution of new automobiles, some major appliances, and some
womens apparel brands.
Selective Distribution
Selective distribution relies on only some of the

intermediaries willing to carry a particular product.
It is used by established companies and by new companies

seeking distributors.
The company does not have to worry about too many outlets;
it can gain adequate market coverage with more control and
less cost than intensive distribution.
Intensive Distribution
Intensive distribution places the goods or services in as many

outlets as possible.
This strategy is generally used for items such as tobacco products,

soap, snack foods, and gumproducts for which the consumer
requires a great deal of location convenience.
In China, popular outlets like wet markets, convenience stores, and

supermarkets are situated within 10 minutes walking distance from
consumers homes.
In Indonesia, Unilever has built a network of nearly 20,000

distributors and two million retailers.
Intensive Distribution: Convenience Stores
Convenience stores such as 7-Eleven and Circle K survive by selling items that provide location and
time convenience.
Shifting Distribution Intensities
Manufacturers are constantly tempted to move from exclusive or

selective distribution to more intensive distribution to increase
coverage and sales.
This strategy may help in the short term, but often hurts long-term
performance.
Intensive distribution increases product and service availability but

may also result in retailers competing aggressively.
If price wars ensue, retailer profitability may also decline, potentially

dampening retailer interest in supporting the product and harming
brand equity.
Terms and Responsibilities of Channel Members
Each channel member must be treated respectfully and given

the opportunity to be profitable.
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
Each channel will produce a different level of sales and costs.
Firms will try to align customers and channels to maximize

demand at the lowest overall cost.
Sellers try to replace high-cost channels with low-cost

channels as long as the value added per sale is sufficient.
See Figure 15.3.
Figure 15.3: The Value-add versus Costs of Different
Channels
Comparing Costs of A Sales Agency versus Setting
Up Ones Own Sales Office
The next step is to estimate the costs of selling different
volumes through each channel.
The cost schedules are shown in Figure 15.4.
The fixed costs of engaging a sales agency are lower than

those of establishing a company sales office, but costs rise
faster through an agency because sales agents get a larger
commission than company salespeople.
The final step is comparing sales and costs.
Comparing Costs of A Sales Agency versus Setting
Up Ones Own Sales Office
As Figure 15.4 shows, there is one sales level (SB) at which
selling costs are the same for the two channels.
The sales agency is thus the better channel for any sales
volume below SB, and the company sales branch is better
at any volume above SB.
Given this information, it is not surprising that sales agents

tend to be used by smaller firms, or by large firms in smaller
territories where the volume is low.
Sales Office Branch or Sales Agency?
The first step is to determine whether a company sales force

or a sales agency will produce more sales.
Most marketing managers believe that a company sales force

will sell more. They concentrate on the companys products;
they are better trained to sell those products; they are more
aggressive because their future depends on the companys
success and they are more successful because many
customers prefer to deal directly with the company.
Sales Office Branch or Sales Agency?
However, the sales agency could conceivably sell more. Some

customers prefer dealing with agents who represent several
manufacturers rather than with salespersons from one
company; and the agency has extensive contacts and
marketplace knowledge, whereas a company sales force would
need to build these from scratch.
Figure 15.4: Break-even Cost Chart for the Choice
Between a Company Sales Force and a
Manufacturers Sales Agency
Control and Adaptive Criteria
Using a sales agency poses a control problem.
To develop a channel, members must make some degree of

commitment to each other for a specified period of time.
Yet these commitments invariably lead to a decrease in the

producers ability to respond to a changing marketplace.
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 system, it must select,

train, motivate, and evaluate individual intermediaries for
each channel.
It must also modify channel design and arrangements over

time.
Selecting Channel Members
To customers, the channels are the company. Companies

need to select their channel members carefully.
To facilitate channel member selection, producers should

determine what characteristics distinguish better
intermediaries.
Evaluative Criteria in Selecting Channel Members
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
Selecting Channel Members
If the intermediaries are sales agents, producers should

evaluate the number and character of other lines carried and
the size and quality of the sales force.
If the intermediaries are department stores that want

exclusive distribution, the producer should evaluate locations,
future growth potential, and type of clientele.
Training and Motivating Channel Members
A company needs to determine intermediaries needs and construct a

channel positioning such that its channel offering is tailored to
provide superior value to these intermediaries.
Stimulating channel members to top performance starts with

understanding their needs and wants.
The company should provide training programs and market research

programs to improve intermediaries performance.
The company must constantly communicate its view that the

intermediaries are partners in a joint effort to satisfy end users of
the product.
Channel Power
Producers vary greatly in skill in managing distributors.
Channel power can be defined as the ability to alter channel

members behavior resulting in actions they would not have
taken otherwise.
Types of Channel Power
1. Coercive powerA manufacturer threatens to withdraw a

resource or terminate a relationship if intermediaries fail to
cooperate. This power can be effective, but its exercise
produces resentment and can generate conflict and lead the
intermediaries to organize countervailing power.
2. Reward powerThe manufacturer offers intermediaries an

extra benefit for performing specific acts or functions. Reward
power typically produces better results than coercive power,
but can be overrated. The intermediaries may come to expect
a reward every time the manufacturer wants a certain
behavior to occur.
3. Legitimate powerThe manufacturer requests a behavior

that is warranted under the contract. As long as the
intermediaries view the manufacturer as a legitimate leader,
legitimate power works.
4. Expert powerThe manufacturer has special knowledge

that the intermediaries value. However, once the expertise is
passed on to the intermediaries, this power weakens. The
manufacturer must continue to develop new expertise so
that the intermediaries will want to continue cooperating.
5. Referent powerThe manufacturer is so highly respected

that intermediaries are proud to be associated with it.
Companies such as McDonalds, Singapore Airlines, and Sony
have high referent power.
Expert Power Uniqlo
Uniqlos takumi team of experienced textile craftsmen gives Uniqlo expert power over its factories as
they offer expertise on how to solve manufacturing problems.
Nature of Channel Powers
Coercive and reward power are objectively observable.
Legitimate, expert, and referent power are more subjective

and dependent on the ability and willingness of parties to
recognize them.
Most producers see gaining intermediaries cooperation as a

huge challenge.
Companies that are more sophisticated try to forge a long-

term partnership with distributors.
Efficient Consumer Response Practices (ECR)
To streamline the supply chain and cut costs, many

manufacturers and retailers have adopted efficient consumer
response practices (ECR) to organize their relationships in three
areas:
1. demand side management or collaborative practices
2. supply side management to optimize supply
3. enablers and integrators, to support joint activities that

reduce operational problems
Wal-Mart and Li & Fung
Wal-Mart entered a procurement deal with Li & Fung to optimize its sourcing portfolio and reduce
costs.
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.
Under performers need to be counseled, retrained, motivated,

or terminated.
Modifying Channel Design and Arrangements
No channel strategy remains

effective over the whole product life
cycle.
In competitive markets with low

entry barriers the optimal structure
will inevitably change over time.
The change could mean adding or

dropping individual market channels
or channel members or developing
a totally new way to sell goods.
Channel Evolution
A new firm typically starts as a local operation selling in a

fairly circumscribed market, using a few existing
intermediaries.
Identifying the best channels might not be a problem; the

problem is often to convince the available intermediaries to
handle the firms line.
Channel Evolution
If the firm is successful, it might branch into new markets

with different channels. In smaller markets, the firm might
sell directly to retailers; in larger markets, through
distributors.
In rural areas, it might work with general-goods merchants;

in urban areas, with limited-line merchants. It might grant
exclusive franchises or sell through all willing outlets.
Channel Modification Decisions
A producer must periodically review and modify its channel design

and arrangements.
The distribution channel may not work as planned, consumer

buying patterns change, the market expands, new competition
arises, innovative distribution channels emerge, and the product
moves into later stages in the product life cycle.
Adding or dropping individual channel members requires an

incremental analysis. Increasingly detailed customer databases and
sophisticated analysis tools can provide guidance into those
decisions.
Challenges of Modifying Channel Strategy
Perhaps the most difficult decision involves revising the overall

channel strategy.
Avons door-to-door system for selling cosmetics was modified as

more women entered the workforce.
Despite the convenience of automated teller machines, online

banking, and telephone call centers, many bank customers still want
high touch over high tech, or at least they want the choice.
Banks are thus opening more branches and developing cross-selling

and up-selling practices to capitalize on the face-to-face contact that
results.
Global Channel Considerations
International markets pose distinct challenges, including

variations in customers shopping habits, but create
opportunities at the same time.
The first step in global channel planning, as is often the case

in marketing, is to get close to customers.
A good retail strategy that offers customers a positive

shopping experience and unique value, if properly adapted, is
likely to find success in more than one market.
Global Expansion Opportunities
International markets pose distinct challenges, including

variations in customers shopping habits, but opportunities at
the same time.
Many global retailers such as United Kingdoms Tesco and

Spains Zara have tailored their image to local needs and
wants when entering a new market.
A good retail strategy that offers customers a positive

shopping experience and unique value, if properly adapted, is
likely to find success in more than one market.
Franchising Operations
Franchised companies such as Subway sandwich shops have

experienced double-digit growth overseas, especially in
developing markets.
In some cases, master franchisees pay a significant fee to

acquire a territory or country where they operate as a mini-
franchiser in their own right.
More knowledgeable about local laws, customs, and customer

needs than foreign companies, they sell and oversee
franchises and collect royalties.
Global Challenges of Channel Strategy
Carrefour had expansion problems in some countries like Japan and South Korea, and faced
competition from IKEA in its home market, France.
Channel Integration and Systems
Distribution channels dont stand still.
New wholesaling and retailing institutions emerge, and new

channel systems evolve.
There are three main systems to study: vertical, horizontal,

and multichannel marketing systems.
Vertical Marketing Systems
A conventional marketing channel comprises an

independent producer, wholesaler(s), and retailer(s). Each is a
separate business seeking to maximize its own profits, even if
this goal reduces profit for the system as a whole. No channel
member has complete or substantial control over other
members.
A vertical marketing system (VMS), by contrast, comprises

the producer, wholesaler(s), and retailer(s) acting as a unified
system. One channel member, the channel captain, owns the
others or franchises them or has so much power that they all
cooperate.
Vertical Marketing Systems
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.
VMSs achieve economies through:
Size
Bargaining power
The elimination of duplicated services
Three Types of Vertical Marketing Systems (VMS)
1. Corporate
2. Administered
3. Contractual
Corporate VMS
A corporate VMS combines successive stages of production

and distribution under single ownership.
Toyota is a good example of backward corporate vertical

integration as it holds equity stakes in key suppliers.
In contrast, sales-distribution keiretsu involves forward

vertical integration from the factory to retail outlets.
Administered VMS
An administered VMS coordinates successive stages of

production and distribution through the size and power of one
of the members.
Manufacturers of a dominant brand are able to secure strong

trade cooperation and support from resellers.
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.
Administered VMS
The manufacturer establishes a department within the

company called distributor-relations planning.
Its job is to identify distributor needs and build up

merchandising programs to help each distributor operate as
efficiently as possible.
Contractual VMS
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.
Contractual VMSs now constitute one of the most significant

developments in the economy.
Types of Contractual VMS
Wholesaler-sponsored voluntary chains:
Wholesalers organize voluntary chains of independent retailers to

help them compete with large chain organizations. The wholesaler
develops a program in which independent retailers standardize
their selling practices and achieve buying economies that enable
the group to compete effectively with chain organizations.
Retailer cooperatives:
Retailers take the initiative and organize a new business entity to

carry on wholesaling and possibly some production. Members
concentrate their purchases through the retailer co-op and plan
their advertising jointly. Profits are passed back to members in
proportion to their purchases.
Franchise organizations:
A channel member called a franchisor might link several

successive stages in the production-distribution process.
Franchising has been the fastest-growing retailing development in
recent years. Although the basic idea is an old one, some forms of
franchising are quite new.
Types of Franchising
The traditional system is the manufacturer-sponsored

retailer franchise. Toyota, for example, licenses dealers to
sell its cars. The dealers are independent businesspeople who
agree to meet specified conditions of sales and services.
Another is the manufacturer-sponsored wholesaler

franchise. Coca-Cola, for example, licenses bottlers
(wholesalers) in various markets who buy its syrup
concentrate and then carbonate, bottle, and sell it to retailers
in local markets.
Types of Franchising
A newer system is the service-firm-sponsored retailer

franchise. A service firm organizes a whole system for bringing
its service efficiently to consumers. Examples are found in the
car rental business (Avis, Hertz) and fast-food-service business
(McDonalds, Burger King).
The New Competition in Retailing
Many independent retailers that have not joined VMSs have

developed specialty stores that serve special market
segments.
The result is a polarization in retailing between large vertical

marketing organizations and independent specialty stores,
which creates a problem for manufacturers.
They are strongly tied to independent intermediaries, but

must eventually realign themselves with the high-growth
vertical marketing systems on less attractive terms.
The New Competition in Retailing
Vertical marketing systems constantly threaten to bypass

large manufacturers and set up their own manufacturing.
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.
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.
Some supermarket chains have arrangements with local banks to

offer in-store banking.
Each company lacks the capital, know-how, production, or

marketing resources to venture alone, or is afraid of the risk.
The companies might work with each other on a temporary or

permanent basis or create a joint venture company.
Integrating Multichannel Marketing Systems
Most companies have adopted multichannel marketing.
Multi-channel marketing occurs when a single firm uses two

or more marketing channels to reach one or more customer
segments.
An integrated marketing channel system is one in which the

strategies and tactics of selling through one channel reflect
the strategies and tactics of selling through other channels.
Multichannel Marketing
Luxury goods maker Coach has

a variety of carefully selected
and managed channel options.
Distribution stakeholders also include many local
retailers, restaurants, and other enterprises that can
reach final consumers.
Coke approached some Chinese neighborhood committees to sell its products. These committees are made up of
pensioners who serve as socialist guardians. They have proven to be useful vehicles for building brand awareness.
Benefits of Adding More Channels
By adding more channels, companies can gain three important

benefits.
1.The first is increased market coverage.
2.The second is lower channel costselling by phone rather

than personal visits to small customers.
3.The third is more customized sellingadding a technical sales

force to sell more complex equipment.
Risks of Adding More Channels
a. New channels typically introduce conflict and control

problems.
b. Two or more channels may end up competing for the same

customers.
c. The new channel may be more independent and make

cooperation more difficult.
Channel Architecture
Companies need to think through their channel architecture.

They must determine which channels should perform which
functions.
Figure 15.5 shows a simple grid to help make channel

architecture decisions. The grid consists of major marketing
channels (as rows) and the major channel tasks that must be
completed (as columns).
Multichannel marketers also need to decide how much of their

product to offer in each of the channels.
Figure 15.5: The Hybrid Grid
Channel Architecture
The grid illustrates why using only one channel is not efficient.
Companies should use different channels for selling to different size

customers.
A company can use its direct sales force to sell to large customers,
telemarketing to sell to midsize customers, and distributors to sell to
small customers; but these gains can be compromised by an
increased level of conflict over who has account ownership.
For example, territory-based sales representatives may want credit

for all sales in their territories, regardless of the marketing channel
used.
Conflict, Cooperation, and Competition
Channel conflict is generated when one channel members

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
Horizontal channel conflict involves conflict between members

at the same level within the channel.
Vertical channel conflict means conflict between different

levels within the same channel.
Multi-channel conflict exists when the manufacturer has

established two or more channels that sell to the same
market.
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.
Causes of Channel Conflict
1. Goal incompatibilityThe manufacturer may want to

achieve rapid market penetration through a low-price policy.
Dealers, in contrast, may prefer to work with high margins
and pursue short-run profitability.
2. Unclear roles and rightsHewlett-Packard may sell

personal computers to large accounts through its own sales
force, but its licensed dealers may also be trying to sell to
large accounts. Territory boundaries and credit for sales
often produce conflict.
Causes of Channel Conflict
3. Differences in perceptionThe manufacturer may be

optimistic about the short-term economic outlook and want
dealers to carry higher inventory. Dealers may be
pessimistic.
4. Intermediaries dependence on the manufacturerThe

fortunes of exclusive dealers, such as auto dealers, are
profoundly affected by the manufacturers product and
pricing decisions. This situation creates a high potential for
conflict.
Managing 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.
There are several mechanisms for effective conflict

management. See Table 15.2.
Table 15.2: Strategies to Manage Channel Conflict
Strategies to Manage Channel Conflict
1. Strategic justificationIn some cases, a convincing strategic

justification that they serve distinctive segments and do not
compete as much as they might think can reduce potential
for conflict among channel members. Developing special
versions of products for different channel members is a clear
way to demonstrate that distinctiveness.
2. Dual compensationDual compensation pays existing

channels for sales made through new channels.
3. Superordinate goalsChannel members can come to an

agreement on the fundamental or superordinate goal they
are jointly seeking, whether it is survival, market share, high
quality, or customer satisfaction. They usually do this when
the channel faces an outside threat, such as more efficient
competing channels, an adverse piece of legislation, or a
shift in consumer desires.
4. Employee exchangeA useful step is to exchange persons

between two or more channel levels.
5. Joint membershipsSimilarly, marketers can encourage joint

memberships in trade associations.
6. Co-optationCo-optation is an effort by one organization to

win the support of the leaders of another by including them
in advisory councils and board of directors.
7. Diplomacy, mediation, and arbitrationWhen conflict is

chronic or acute, the parties may need to resort to stronger
means. Diplomacy takes place when each side sends a
person or group to meet with its counterpart to resolve the
conflict. Mediation relies on a neutral third party skilled in
conciliating the two parties interests. In arbitration, two
parties agree to present their arguments to one or more
arbitrators and accept their decision.
8. Legal recourseIf nothing else proves effective, a channel

partner may choose to file a lawsuit.
Dilution and Cannibalization
Marketers must also be careful not to dilute their brands

through inappropriate channels, particularly luxury brands
whose images often rest on exclusivity and personalized
service.
Example: Impact of the Internet on Shopping for Luxury

Goods
Dilution and Cannibalization
To help tap into affluent shoppers who work long hours and have little time to
shop, high-end fashion brands such as Dior, Louis Vuitton, and Fendi have
unveiled e-commerce sites.
These luxury makers also see their Web sites as a way for customers to
research items before walking into a store and a means to help combat fakes
sold over the Internet.
Given the lengths these brands go to pamper their customers in their stores
doormen, glasses of champagne, extravagant surroundingsthey have had to
work hard to provide a high quality experience online.
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 tactics that might keep competitors from using a
channel.
Many producers like to develop exclusive channels for their

products.
When the seller requires that these dealers not handle

competitors products, this is called exclusive distribution.
Exclusive distribution 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.
Exclusive distribution often includes exclusive territorial

agreements.
The producer may agree not to sell to other dealers in a given

area.
The buyer may agree to sell only in its own territory.
This second practice has become a major legal issue.
Producers of a strong brand sometimes sell it to dealers only

if they will take some or all of the rest of the line.
This practice is called full-line forcing.
Gray Marketing
The practice of gray marketing or parallel importing.
This involves the sale of authorized, branded products through

unauthorized channels.
While counterfeiting (or black marketing) is illegal, gray marketing

is in many cases legal and occurs frequently in Asia.
The major suppliers of parallel imports include authorized

intermediaries (often in other markets), professional arbitragers like
trading houses, and manufacturers (either through their
headquarters or foreign divisions).
Parallel Imports or Gray Markets: Mercedes Benz
Parallel imports or gray markets of Mercedes Benz can be found in Asia. Parallel importers offer a
lower price but may not offer as comprehensive a service as the authorized dealers
Factors Giving Rise to the Growth of Gray Marketing
1. Differential pricing to different channel members may lead to

a distributor over-ordering to obtain a discount and then
selling off the excess to unauthorized channels.
2. Manufacturers may price differently to different geographic

markets due to differences in tax, exchange rates, or price
sensitivity. This enables parallel importers to buy from the
cheapest source worldwide and, in some cases like China,
smuggle the goods to avoid duty. This provides a cost
advantage to parallel importers over authorized dealers who
must bear the cost of advertising and promotion.
3. Products may be sold through high-service, high-price

channels, providing an opportunity to introduce gray markets
through discount retailers. Japanese discount chain Jonan
Denki takes employees on post-Christmas European
shopping trips to legally purchase large quantities of luxury
brands for sale in its stores.
4. The development of emerging markets and worldwide trade

liberalization create incentives for firms to capitalize on their
brand equity and volume potential by offering similar
products across different countries. However, this leads to
substantial price variation across nations due to differences
in exchange rates, purchasing power, and supply-side factors
(e.g., distribution and servicing).
Actions Taken to Control Parallel Importing
Manufacturers may stop parallel importing by taking legal

action where possible, checking their own order-processing
procedures, keeping track of their products, and limiting
differential pricing policies to reduce or prevent arbitrage
opportunities.
They may also police their distributors, raise their prices to

lower-cost intermediaries, or alter product or service features
for different channels.
However, the costs and benefits of gray marketing should be

considered before taking any action.
Manufacturers may tolerate gray marketing where:
1. violations are difficult to detect or document
2. the potential for one channel to free-ride on another member

is low
3. the product is mature
4. the parallel importer is a high-performing dealer loyal to the

manufacturer rather than one which carries competing
brands in the manufacturers product category
Taking Advantage of Gray Markets
Some manufacturers actually welcome gray markets as these

increase their coverage in emerging markets, pressure
authorized channels to compete harder, and avail the product
to price-sensitive consumers.
This occurs for hard liquor, cigarettes, and other fast-moving

consumer goods in China, Indonesia, and Vietnam.
Taking Advantage of Gray Markets
While ethically questionable, the objective is to achieve a

substantial market share and brand recognition with products
sold relatively cheaply from the non payment of customs
duties.
Such manufacturers can also simultaneously reap the benefit

from the image of an imported brand with perceived superior
quality.
E-Commerce Marketing Practices
E-commerce uses a Web site to transact or facilitate the sale of products

and services online.
Online retail sales have exploded in recent years, and it is easy to see why.
Online retailers can predictably provide convenient, informative, and

personalized experiences for vastly different types of consumers and
businesses.
We can distinguish between pure-click companies, those that have

launched a Web site without any previous existence as a firm, and brick-
and-click companies, existing companies that have added an online site
for information and/or e-commerce.
Pure-Click Companies
There are several kinds of

pure-click companies:
i. search engines
ii. Internet Service Providers
(ISPs)
iii. commerce sites
iv. transaction sites
v. content sites
vi. enabler sites.
Pure-Click Companies
Commerce sites sell all types

of products and services,
notably books, music, toys,
insurance, stocks, clothes,
financial services, and so on.
Online Mall Taobao
Taobao Mall is Chinas largest online marketplace. Samsung, Levis, and adidas use Taobao to sell
their products online.
E-Commerce Success Factors
Companies must set up and operate their e-commerce Web

sites carefully. Customer service is critical.
Online shoppers may select an item for purchase but fail to

complete the transaction.
Consumer surveys suggest that the most significant inhibitors

of online shopping are the absence of pleasurable
experiences, social interaction, and personal consultation with
a company representative.
Some companies use live online chat to give potential

customers immediate advice about products for sale on their
Web sites. Another benefit of providing live sales assistance is
the ability to sell additional items.
To increase the entertainment and information value and the

customer satisfaction from Web-based shopping experiences,
some firms are employing avatars, graphical representations
of virtual, animated characters that can act as company
representatives.
Ensuring security and privacy online remains important.

Customers must find the Web site trustworthy, even if it
represents an already highly credible offline firm.
Online retailers are also trying new technologies, such as

blogs, social networks, and mobile marketing, to attract new
shoppers.
B2B E-Commerce
Although business-to-consumer (B2C) Web sites have

attracted much attention in the media, even more activity is
being conducted on business-to-business (B2B) sites, which
are changing the supplier-customer relationship in profound
ways.
In the past, buyers exerted a lot of effort to gather

information about worldwide suppliers.
B2B E-Commerce
With the Internet, buyers have easy access to a great deal of

information.
They can get information from:

a. supplier Web sites
b. infomediaries, third parties that add value by aggregating
information about alternatives
c. market makers, third parties that create markets linking buyers
and sellers
d. customer communities, Web sites where buyers can swap
stories about suppliers products and services
B2B E-Commerce Alibaba
Alibaba is the largest online B2B marketplace. It is home-grown in China, a country where
businesses have faced decades of Communist antipathy to private enterprise.
Benefits of B2B E-Commerce
The effect of these mechanisms is to make prices more transparent.
In the case of undifferentiated products, price pressure will

increase.
For highly differentiated products, buyers will gain a better picture

of the items true value.
Suppliers of superior products will be able to offset price

transparency with value transparency; suppliers of undifferentiated
products will need to drive down their costs in order to compete.
Brick-and-Click Companies
Although many brick-and-mortar companies may have initially

debated whether to add an online e-commerce channel for
fear of channel conflict with their off-line retailers, agents, or their
own stores, most eventually added the Internet as a distribution
channel after seeing how much business was generated online.
Adding an e-commerce channel creates the threat of a backlash

from retailers, brokers, agents, or other intermediaries.
The question is how to sell both through intermediaries and online.
Gaining Acceptance for Online E-Commerce Channel
from Intermediaries
There are at least three strategies for trying to gain
acceptance from intermediaries:
i. Offer different brands or products on the Internet.
ii. Offer the off-line partners higher commissions to cushion the

negative impact on sales.
iii. Take orders on the Web site but have retailers deliver and
collect payment.
Decisions on Deploying Online e-Commerce Channel
Some pure or predominately online companies have invested

in brick-and-mortar sites.
Ultimately, companies may need to decide whether to drop

some or all of their retailers and go direct.
M-Commerce
The widespread penetration of cell phones and smart phones

there are currently more mobile phones than personal
computers in the worldallows people to connect to the
Internet and place online orders on the move.
Many see a big future in what is now called m-commerce (m for

mobile). The existence of mobile channels and media can keep
consumers connected and interacting with a brand throughout
their day-to-day lives.
GPS-type features can help identify shopping or purchase

opportunities for consumers for their favorite brands.
M-CommerceJapan
In some countries, m-commerce already has a strong foothold.
Millions of Japanese teenagers carry DoCoMo phones available from

NTT (Nippon Telephone and Telegraph).
They can also use their phones to order goods.
Each month, the subscriber receives a bill from NTT listing the
monthly subscriber fee, the usage fee, and the cost of all the
transactions.
Bills can be paid at the nearest 7-Eleven store.
M-CommerceJapan
In Japan, m-commerce is
popular as the mobile phone
is used to buy almost
anything from concert tickets
to canned drinks from the
vending machine.
M-Commerce Applications
Retailers such as Amazon have launched m-commerce sites

that allow consumers to buy books, medicine, and even lawn
mowers from their smart phones.
The travel industry has used m-commerce to target

businesspeople who need to book air or hotel reservations
while on the move.
Mobile marketing can have influence inside the store too.

Consumers increasingly are using a cell phone to text a friend
or relative about a product while shopping.
Schema for Chapter Fifteen
Schema for Chapter Fifteen
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Marketing Management:

1. What is a marketing channel system and a value network?

2. What work marketing channels perform?

3. How should channels be designed?

4. What decisions companies face in managing their channels?

5. How companies should integrate channels and manage

6. What are the key issues with e-commerce and m-commerce?

Successful value creation needs successful value delivery.

Holistic marketers are increasingly taking a value network

Instead of limiting their focus to their immediate suppliers,

Companies are looking at the suppliers suppliers upstream

They are looking at customer segments and considering a

Companies today must build and manage a continuously

Most producers do not sell their goods directly to the final

These intermediaries constitute a marketing channel (also

Marketing channels are sets of interdependent

Some intermediaries buy, take title to, and resell the

Others search for customers and may negotiate on the

Still others assist in the distribution process but neither takes

A marketing channel system is the particular set of marketing

Decisions about the marketing channel system are among the

In the United States, channel members collectively earn

Marketing channels also represent a substantial opportunity

Converting potential buyers into profitable orders is one of

Marketing channels must not simply serve markets, they

The channels chosen affect all other marketing decisions:

1. The companys pricing depends on whether it uses mass-

2. The firms sales force and advertising decisions depend on how

3. In addition, channel decisions involve relatively long-term

In managing its intermediaries, the firm must decide how much

A push strategy involves the manufacturer using its sales

Push strategy is appropriate where there is low brand loyalty

A pull strategy involves the manufacturer using advertising

Pull strategy is appropriate when there is high brand loyalty

Todays successful companies are also multiplying the number of

Hybrid channels or multichannel marketing occurs when a single

In multichannel marketing, each channel targets a different

Companies that manage hybrid channels must make sure

Customers expect channel integration, characterized by the

A supply chain view of a firm sees markets as destination

This view has been called demand chain planning.

An even broader view sees a company at the center of a

A value network includes a firms suppliers, its suppliers

Demand chain planning yields several insights:

1. The company can estimate whether more money is made

2. The company is more aware of disturbances anywhere in the

3. Companies can go online with their business partners to carry on

Why would a producer

Through their contacts, experience,

Many producers lack the financial

A marketing channel performs the work of moving goods from producers to

Members of the marketing channel perform a number of key functions.

Some functions constitute a forward flow of activity from the company to

Other functions constitute a backward flow from customers to the

Still others occur in both directions.

Five flows are illustrated in Figure 15.1 for the marketing of

If these flows were superimposed in one diagram, the

A manufacturer selling a physical product and services might

The question is not whether various channel functions need to

All channel functions have three things in common:

i. they use up scarce resources;

ii. they can often be performed better through specialization; and

iii. they can be shifted among channel members.

When the manufacturer shifts some functions to