Designing the Marketing Channel Chapter 6 Designing the Marketing Channel

Channel Design Channel Design Important points: 6 Objective 1: 6 Channel Design Channel Design Decisions involving either the development of new marketing channels where none had previously existed or the modification of existing channels Important points: A decision made by the marketer The creation or modification of channels The active allocation of distribution tasks in an attempt to develop an efficient structure The selection of channel members A strategic tool for gaining a differential advantage

Who Engages in Channel Design Objective 2: 6 Who Engages in Channel Design Manufacturers: Includes also service providers and franchisors Must look down the channel toward the market Wholesalers Must look both up and down the channel Retailers Must look up the channel to secure suppliers

Channel Design Paradigm Objective 3: 6 Channel Design Paradigm Seven (7) Steps to Consider: Recognize the need for channel design decision Set & coordinate distribution objectives Specify distribution tasks Develop alternative channel structures Evaluate relevant variables Choose the “best” channel structure Select channel members

Channel Design Decisions (in relation to Channel Strategy Framework) Objective 3: 6 Channel Design Decisions (in relation to Channel Strategy Framework) Role of Distribution @ Corp. Level Role of Distribution @ Mktg Mix Level Development of Channel Strategy(s)* Design One’s Channel Structure(s) Selection of Channel Members Manage (Run) Channel Structure(s) Evaluation of Channel Performance Recognize the Need Est. Distribution Objectives Specify Distribution Tasks Develop Alternative Structures Evaluate Relevant Variables Choose “Best” Structure Select Members

When to Make a Channel Design Decision Objective 4: 6 When to Make a Channel Design Decision Developing a new product or product line Aiming an existing product at a new market Making a major change in some other component of the marketing mix Establishing a new firm Adapting to changing intermediary policies that may inhibit attainment of distribution objectives Dealing with changes in availability of particular kinds of intermediaries Opening up new geographic marketing areas Facing the occurrence of major environmental changes Meeting the challenge of conflict or other behavioral problems Reviewing and evaluating existing members’ performance

Distribution Objectives 6 Distribution Objectives Setting distribution objectives requires knowledge of which, if any, existing objectives & strategies may impinge on these new distribution objectives.

The Need for Congruency 6 The Need for Congruency Holistic approach is needed… Distribution is often really a facilitator for achieving the firm’s other objectives Product marketing Price marketing Promotion marketing And the firm’s marketing mix objectives are derived from the firm’s overall objectives an strategies. A change in one area is likely to affect all other areas.

Objective 6: 6 Distribution Tasks Outlining distribution tasks is highly idiosyncratic and situationally specific i.e., Tasks are a function of the distribution objectives and the firms involved 8 marketing functions are as specific as one can get on any generalizable scale* Note the 8 functions though represent general categories which your text’s task all fall under*

Channel Structure Dimensions Objective 7: 6 Channel Structure Dimensions Number of levels Intensity at each level Control (for mgmt & image) Types of intermediaries at each level

6 Number of Levels Often ranges from two (i.e., manufacturer and customer) to five or more Number of alternatives is often limited to two or three choices because of factors like: Particular industry practices (e.g., automobiles) Nature & size of market Availability of intermediaries

Intensity at Various Levels 6 Intensity at Various Levels Positive relationship between the intensity of the distribution dimension & number of intermediaries used (in a given market area)* Intensity Dimension Intensive Selective Exclusive Numbers of Intermediaries (retail level) Many Few One

Types of Intermediaries 6 Types of Intermediaries Numerous types E.g., retailers, wholesalers, A/Bs, etc. Manager’s emphasis should be on the types of tasks performed by each & what’s needed Must be aware of emerging types: Electronic online auctions for consumers (e.g., eBay) Electronic markets for industrial goods (converge.com) Demand collection channels (priceline.com)*

Variables Affecting Channel Structure Objective 8: 6 Variables Affecting Channel Structure Categories of variables: Market variables Product variables Company variables Intermediary variables Environmental variables Behavioral variables

Market Variables Market geography Market size Market density 6 Market Variables Market geography Location, geographical size, & distance from producer Market size Number of customers in a market Market density Number of buying units (consumers or firms) per unit of land area Market behavior Who buys, & how, when, and where customers buy

Product Variables Bulk and weight Perishability Unit value 6 Product Variables Bulk and weight Perishability Unit value Degree of standardization Technical vs. nontechnical Newness

Company Variables Size Financial capacity Managerial expertise 6 Company Variables Size Larger often confers greater “power bases” Financial capacity Greater capital lessens dependency Managerial expertise Increases dependency on others’ expertise Objectives & strategies Particulars may limit alternatives

Intermediary Variables 6 Intermediary Variables Availability Positively related to length Cost Negatively related to length Services (available from intermediaries) Positively related to use

Environmental Variables 6 Environmental Variables Economic Sociocultural Competitive Technological Legal *reference Ch. 3 for effects*

*reference Ch. 4 for effects* 6 Behavioral Variables Develop congruent roles for all channel members Be aware of members’ “power bases” Manage communication channels to minimize possible conflict *reference Ch. 4 for effects*

Heuristics in Channel Design Objective 9: 6 Heuristics in Channel Design Heuristics Rules of thumb Benefits Fairly simple prescriptions for channel structure Limitations Mostly useful as a rough guide to decision-making

Choosing an Optimal Channel Structure Objective 10: 6 Choosing an Optimal Channel Structure Why is management incapable of choosing an optimal channel structure? All possible outcome alternatives are unknown Precise methods for calculating the exact payoffs associated with each alternative structure do not exist Which is why we assume with the use of heuristics & why tacit knowledge is so important…

Approaches for Choosing a Channel Structure Objective 11: 6 Approaches for Choosing a Channel Structure Some techniques for enhancing our channel design decisions include the: “Characteristics of Goods & Parallel Systems” Approach Financial Approach Transaction Cost Analysis Approach Management Science Approaches Judgmental-Heuristic Approach*

Judgmental Heuristic Approaches Objective 12: 6 Judgmental Heuristic Approaches Assuming that management’s ability to make judgments is high, and good empirical data on costs & revenues exists then… It’s possible to make satisfactory channel design choices using the judgmental-heuristic approach

Judgmental Heuristic Approaches 6 Judgmental Heuristic Approaches 3 General Approaches: Straight Qualitative Judgment Approach Weighted Factor Score Approach Distribution Costing Approach*