1 MARKETING CHANNELS Administrative Structures Berman Chapter 12 Version 3.0

2 Administrative Structures 1. Conventional vs Vertical Systems 2. Corporate Marketing Systems 3. Administered Marketing Systems 4. Contractual marketing Systems 5. Legal Aspects of VMS’s and Franchises

3 1. Conventional vs Vertical Conventional Channel –each unit is independently owned Vertical Marketing Systems –alliances and networks –unified teams –types corporate administered contractual

4 2. Corporate Marketing Systems –one firm ownership vs conventional –highest level of coordination and control Forward vertical integration –mfgr or whlslrs acquire retailers –advantages 100% control sensitive to customer trends control of channel suppliers examples - Avon, Sherwin Williams, Allstate

5 Backward integration –retailers acquire mfgrs or whslrs –assures continuous source of supply –dual channel opportunity –examples - Sears, Supervalu, Ralph Lauren Problems –effective control of all functions Adapted Systems –outsourcing, free up capital requirements Profitability –transfer pricing, asset allocation

6 3. Administered Marketing Systems –closest to conventional marketing systems –allocates, coordinates reseller responsibilities –no ownership linkage or formal long term contracts –close to Relationship marketing concept –base = relationships, trust, information sharing –requires a channel leader with reward, referent, expertise, persuasion, coercion, legitimate and information powers

7 Administered characteristics –shifting functions among resellers General Electric Direct Control Program –programmed merchandising agreements major promotional programs high acceptance of leader

8 4. Contractual Marketing Systems –coordination of members –legal agreements of responsibilities –formalized procedures, policies, rules Three forms –retail owned cooperative –wholesaler sponsored voluntary chains –franchises

9 Retailer Owned Cooperatives wholesalers and manufacturers –purchase, lease or build variations –stock-based ownership –profit and non-profit divisions –member and non-member directorships –dividend payouts, vesting disadvantages –restrictive covenants, exit barriers, outside retaliation, large/ small member conflict

10 Wholesaler sponsored voluntary chains objectives –greater efficiency and effectiveness –retailers affiliate with wholesalers –ownership and power difference from ret coop –wholesaler authority, expertise and leadership

11 Franchise Systems –formal contractual agreements –franchise fees, royalty payments types –organizational format M-R, W-R, Service sponsor-R –type of agreement Mfgr franchise, Product/Trademark franchise, business format franchise –form of franchise expansion unit franchise, conversion franchise, area development franchise, subfranchising

12 Franchise methods –legal and economic control –administrative coordination –secondary linkages Conflicts –royalty payments vs low price specials –new outlets vs established territories –company owned sites vs franchise sites –captive commodity items –new locations, scarce product allocations –real estate control by franchisor –national advertising programs –terminations

13 Franchisor advantages and disadvantages Advantages resource scarcity administrative efficiency rapid market penetration economy of scale Disadvantages loss of control to franchisee outlet restrictions

14 Franchise advantages and disadvantages Advantages uniform image economies of scale management assistance special services national advertising proven format Disadvantages conflicts overstated income one sided contracts system costs constrained decision making

15 Trends in Franchising changing nature increase capital availability better contacts and contracts for Franchisee more executive talent better educated franchisees globalization –world wide opportunities

16 5. Legal Aspects Federal and State regulation of franchises –shared intellectual properties –trademarks vs royalties –payments for rights to system –marketing and operating system participation Tying arrangements FTC disclosure laws, state laws –23 categories Acceptance and Termination agreements