Success Strategies in Channel Management Channel Design and Implementation

Channel Design and Implementation Channel Access Formats Sec3.1.ppt

Channel Design and Implementation Channel Design: Segmentation Channel Selection Channels Type Options Establish New Channels or Refine Existing Channels?

Channel Design and Implementation What is the best marketing channel for a particular value offer? The marketing channel challenge involves two major tasks: (1) to design the right channel and (2) to implement that design. The design step involves segmenting the market, identifying optimal positioning responses to segments' demands, targeting the segments on which to focus the channel's efforts, and establishing or refining (the channels to manage in the marketplace. The implementation step requires an understanding of each channel member's sources of power and dependence, an understanding of the potential for channel conflict, and a resulting plan where the optimal channel design can be effectively executed on an ongoing basis.. The design step involves segmenting the market, identifying optimal positioning responses to segments' demands, targeting the segments on which to focus the channel's efforts, and establishing (in the absence of a pre-existing channel) or refining (in the presence of a pre-existing channel) the channels to manage in the marketplace. The implementation step requires an understanding of each channel member's sources of power and dependence, an understanding of the potential for channel conflict, and a resulting plan for creating an environment where the optimal channel design can be effectively executed on an ongoing basis. This outcome is called channel coordination.

Channel Management Schematic

Channel Design: Segmentation One of the fundamental principles of marketing is the segmentation and targeting of the market. A marketing channel is more than just a conduit for products. It is also a means of adding value to the offer marketed through it. These value-added services created by channel members and consumed by end-users along with the product purchased are called service outputs. Segmentation means the splitting of a market into groups of end-users who are (1) maximally similar within each group and (2) maximally different between groups. But maximally similar or maximally different based on what criterion? For the channel manager, segments are best defined on the basis of demands for the outputs of the marketing channel.

The channels mix depends largely on market segment profiles. Channel Selection Producers typically develop multi channel distribution systems in which there is some mix of direct supply – sales force, independent distributors, captive distributors, and MRs with one or more representing the dominant channel(s) in each market segment. The channels mix depends largely on market segment profiles.

Channel Design: Targeting Channel Design: Positioning When the market has been segmented into groups of end-users, and the best options targeted, the channel manager should next define the optimal channel to serve each segment. We call this exercise positioning or configuring the channel The optimal channel is defined first and foremost by the necessary channel flows that must be performed in order to generate the specific segment's service output demands. Channel flows are all the activities of the channel that add value to the end-user. At this stage of the analysis, the channel manager needs to decide what segments to target. Note carefully that this also means that the channel manager is now equipped to decide what segments not to target! Knowing what segments to ignore in one's channel design and management efforts is very important, because it keeps the channel focused on the key segments from which it plans to reap profitable sales. Just as positioning a product means setting its marketing mix to best fit the demands of a particular segment, so also positioning refers to the design of the distribution channel to meet the segment's demands. In enumerating the list of channel flows, we go beyond the concept of the mere handling of the product to include issues of promotion, negotiation, financing, ordering, payment, and the like.

Positioning The other main element of the channel structure is the decision of how many of each type of channel member will be in the channel. This is the channel intensity decision. The channel structure decisions of type, identity, and intensity of channel members all should be made with the minimization of channel flow costs in mind. That is, each channel member is allocated a set of channel flows to perform, and ideally the allocation of activities results in the reliable performance of all channel flows at minimum total cost. Further, the channel analyst must identify the optimal channel structure to produce the necessary channel flows. The design of the channel structure involves two main elements. First, the channel designer must decide who are to be the members of the channel. Moving up the channel from the retail level, decisions must be made whether to use independent distributors, independent sales representative companies, independent trucking companies, financing companies, and any of a whole host of other possible independent distribution channel members. Beyond this decision, the channel manager must also decide which channel partners to use at each level of the channel. Further, the channel analyst must identify the optimal channel structure to produce the necessary channel flows, which result in the generation of the required service outputs that are demanded by a particular segment of end-users in the market. The design of the channel structure involves two main elements. First, the channel designer must decide who are to be the members of the channel. Moving up the channel from the retail level, decisions must be made whether to use independent distributors, independent sales representative companies (called "reps" or "rep organisations"), independent trucking companies, financing companies, export management companies, Beyond this decision, the channel manager must also decide which channel partners to use at each level of the channel.

Channels Type Options The level of distribution intensity is an important strategic choice. How many resellers should there be in a local market? There are three considerations: The first is the level of channels investments needed - and in specialised resources such as equipment and personnel - to service the line. User purchasing behaviour is the second consideration. The third consideration in planning distribution intensity is the volume of available business in an area. In addition to choosing the types of channels through which to go to market, producers make critical choices on three other dimensions of channels strategy: (1) distribution intensity, that is the number of intermediaries in a trading area; (2) where in the system different distribution functions will be performed; and (3) the terms and conditions of the distribution arrangement. The level of distribution intensity is an important strategic choice. How many resellers should there be in a local market? There are three considerations: The first is the level of channels investments needed - both in inventories required to support a given level of sales and in specialised resources such as equipment and personnel - to service the line. When high distributor investments are required, the supplier's representation must be less intensive in order to attract resellers to take on its line. User purchasing behaviour is the second consideration. If buyers engage in a search process, if the purchase is typically unbundled, and if the buying decision-making process involves the negotiation of product features, prices, and terms, fewer resellers are needed in an area than if convenience is of primary concern to buyers. The third consideration in planning distribution intensity is the volume of available business in an area. Often, producers with high market shares and a large installed base of products will have more distributors in a trading area than those with lower market shares. There is some level of potential revenue below which it may be difficult to attract established resellers; thus the lower the producer's market share in a trading area, the fewer are the parts into which it can be divided for purposes of establishing a channels network. Often the rationale for multiple representation in a geographic area is that different distributor types are needed to reach different market segments - say, residential construction, industrial users, and OEMs. Distributors may also be franchised because they have loyal customers due to personal relationships, credit extensions, and convenience, or strong positions with certain large accounts. While multiple representation in a geographic area may address clusters of user- customers, market segments are seldom so neatly compartmentalised as to preclude intense intrabrand competition among distributors. At the same time, a supplier that attempts to mitigate price competition by reducing representation runs the risk of losing sales volume.

Establish New Channels or Refine Existing Channels? If no channel exists currently in the market for this segment, the channel manager should now establish the channel design that comes the closest to meeting the target market's demands for service outputs, subject to the environmental and managerial bounds constraining the design. If there is a pre-existing channel in place in the market, however, the channel manager should now perform a gap analysis. The concept of interdependence is critical to remember. Because of the extreme interdependence of all channel members and the value of specialization in channels, attention must be paid to all the design and management elements to ensure an effective marketing channel effort. If there is a pre-existing channel in place in the market, however, the channel manager should now perform a gap analysis. The differences between the zero-based and actual channels on the demand and supply sides constitute gaps in the channel design. The concept of interdependence is critical to remember. Because of the extreme interdependence of all channel members and the value of specialization in channels, attention must be paid to all the design and management elements to ensure an effective marketing channel effort.

Direct Supply. Buyer concentration and transaction size affect sales costs directly. In trading off the costs of supporting a direct sales force against giving distributors a percentage margin, producers often realise higher net returns in selling directly to large accounts as opposed to selling through distributors. If sales costs relative to transaction size permit the use of direct selling, there are other advantages in this mode of distribution. Product advocacy is one. The producer's sales representatives are typically motivated to compete aggressively to win the sale. Another advantage is negotiating strength. A direct sales relationship with the user-customer facilitates the negotiation of terms of sale. The conditions that foster a predominantly direct sales distribution system are (1) a high concentration of buyers, (2) a large dollar amount of individual purchase transactions, and (3) greater needs of buyers for technical product information or for product customisation. Buyer concentration and transaction size affect sales costs directly. In trading off the costs of supporting a direct sales force against giving distributors a percentage margin, producers often realise higher net returns in selling directly to large accounts as opposed to selling through distributors. Buyers' needs for technical support and for products configured to their particular usage requirements, too, seem often to be best served through direct communication with suppliers. If sales costs relative to transaction size permit the use of direct selling, there are other advantages in this mode of distribution. Product advocacy is one. Committed to selling their employer's product and measured accordingly, the producer's sales representatives are typically motivated to compete aggressively to win the sale. Another advantage is negotiating strength. A direct sales relationship with the user-customer facilitates the negotiation of prices and terms of sale, taking into consideration competitive offerings and the customer's unique requirements. To conduct such negotiations through an intermediary introduces added complexity and issues concerning how to rationalise negotiated prices and terms with published distributor price schedules.

Independent Distributors. The conditions that support a high proportion of reseller distribution are (1) widely dispersed and fragmented markets, (2) low transaction amounts, and (3) bundled purchase behaviour, that is, the buyer's propensity to purchase a number of items, often different brands, in one transaction. The essential consideration in selecting a particular type of distribution channel is the channel's ability to serve the needs of the target end-market. Buyer needs vary considerably by market segment, and the resellers that serve these clusters of buyers tend to shape their own value offerings in response to the distinctive requirements of their customers. In the flow of goods to market, the producer's product becomes part of a total package of benefits, tailored to selected classes of user- customers and sold through those channels which address their needs.

Captive Distribution. Often, captive branches are established in geographic markets where the producer is unable to recruit qualified independent resellers. On the other hand, captive distribution arms sometimes compete directly with other channels elements, both independent resellers and the company's direct sales force. Maintaining a captive distribution network may come at some cost in enlisting the full support of other intermediaries. While a captive distribution network in a multi channel distribution system is a source of marketing strength, it remains the subject of considerable controversy, both within the producer firm and among other elements in the distribution system. To briefly summarise here, captive branches, precluded from carrying competitive product offerings, provide added market access for the products of the parent corporation. These operations can also serve as training grounds for product division managers whose career development would benefit from an experience in end-market selling.

Manufacturers Reps. An MR (agent) network tends to be favoured over direct selling if resources are not available to cover the fixed overheads associated with a direct sales force - salesperson salaries and expenses, sales administration, and other overheads. Still another reason for using agents is that the product line is simply not broad enough to provide the base for supporting a direct sales operation, yet the product requires technical selling. Thus, in recruiting MRs as agents, producers may seek a market segment or product application expertise that is not present in their own sales organisations. The three conditions that lead toward the use of agents are the same as those which favour direct sales: (1) concentrated markets, (2) large individual transactions, and (3) buyers' needs for technical support and/or product customisation. For producers too small to afford these fixed costs or for those which give higher priority to other uses of their capital, agents offer the benefit of minimising fixed selling expenses. Thus, in recruiting MRs as agents, producers may seek a market segment or product application expertise that is not present in their own sales organisations. They may also choose agents over a direct sales force if, their product line is narrow and can benefit from being part of an agent's broader line. An MR with, say, ten lines might have a product portfolio sufficient to support a small sales force. Finally, producers may have more urgent uses for their limited capital than investing in the fixed overheads to support a direct sales force.

Corporate, Administered and Contractual Channels A corporate channel is a centrally owned and operated vertical marketing system that is programmed for concerted action and the achievement of certain economies. An administered channel is one in which an agent is able to exercise administrative control over a vertical network by dint of its economic power. A contractual channel is one in which independent firms have joined together on a contractual basis to achieve buying and selling power through combination. An administered channel is one in which an agent is able to exercise administrative control over a vertical network by dint of its economic power. For example, Kraft and Heinz are two examples of companies that have carved a pipeline from raw materials to finished products and enjoy space management privileges in supermarkets to administer their end point marketing mix.

Six Steps in a Distribution Strategy 1. Find good partners. 2. Seek a distinctive market position. 3. Identify available alternative distribution routes. Also consider alternatives to present channels. 4. Focus your distribution resources. The market is too big for a shotgun approach. 5. Prepare for a long-term effort. 6. Cultivate personal relationships in distribution. Remember, loyalty and trust are important.