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Distribution management
Marketing channels of distribution
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What is a marketing channel?
A set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user (Kotler & Armstrong,2009)
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Why do producers need marketing channel?
Marketing channels create greater efficiency in making goods available to target markets. Through their contacts, experience , specialization, and scale of operations , channels offer the producer more than it can achieve on its own. Marketing channels transform products into units required by consumers (break bulk)
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What are the other key functions performed by marketing channels?
Information gathering Promotion Contact Matching Negotiation Physical distribution Financing Risk taking
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How do marketing channels add customer value?
Marketing channels add customer value by bridging the major time, place and possession gaps that separate goods and services from those who use them. Marketing channels ensure customers receive and take possession(ownership) of goods and services at the right time, at the right place and in the right quantities.
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Marketing Channels & Marketing Management Strategy
Marketing strategy is the blending of four controllable marketing variables (i.e. price, product, promotion & place) to meet the needs of the target market. The place component of the marketing mix represents distribution. Marketing Management deals with the development & operation of marketing channels in such a way as to support & enhance the other variables of the marketing mix.
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Growing importance of marketing channels
Explosion of IT& E-commerce has opened new ways for connecting with customers . Greater difficulty in gaining a sustainable competitive advantage through price, product & promotion Growing power of distributors, especially large retailers . High distribution costs.
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Major channel participants
Producers & manufacturers- firms that are involved in extracting, growing or making products. Intermediaries/ middlemen- independent businesses that assist producers , manufacturers & final users in the performance of distribution functions. Final users – consumers and industries Facilitating agencies –business firms that assist in the performance of distribution tasks other than buying, selling and transferring of title. E.g. insurance brokers.
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Manufacturers & producers
Include firms involved in agriculture, forestry, fishing, mining, construction, manufacturing , and some service industries. The firms vary enormously in terms of diversity of goods and services produced and the size of firms. All exist to provide products that satisfy the needs of customers.
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Intermediaries Operate basically at two levels: wholesale and Retail
Wholesalers – businesses that are engaged in selling goods for resale or business use. Include agents or brokers involved in either buying goods for or selling them to customers Three major types of wholesalers: merchant wholesalers, Agents , brokers, and commission merchants Manufacturer’s sales branches & offices
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Merchant wholesalers Firms engaged primarily in buying, taking title to, usually storing , and physically handling products in relatively large quantities and then reselling the products in smaller quantities to retailers, to industrial , commercial , or institutional concerns ; and to other wholesalers. They go by different names e.g. wholesaler, jobber, distributor, industrial distributor, supply house, assembler, importer, exporter etc
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Distribution tasks performed by Merchant Wholesalers
Distribution tasks performed on behalf of manufactures: Providing market coverage Making sales contacts Holding inventory Processing orders Gathering market information Offering customer support
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Distribution tasks performed by Merchant Wholesalers
Distribution tasks performed on behalf of customers: Ensure product availability Provide customer service Extend credit & financial assistance Offering assortment convenience Breaking bulk Help customers with advice & technical support
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Agents, brokers, and commission merchants
Independent middlemen who do not, for all or most of their business, take title to the goods in which they deal, but are actively involved in buying & selling negotiations while acting on behalf of their clients. Usually compensated in the form of commissions on sales or purchases. Examples include manufacturer’s agents, commission merchants, brokers, selling agents, and import/export agents.
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Distribution tasks performed by agent* wholesalers
Market coverage-avail products to a wide base of customers who are geographically dispersed. Sales contact or sales reps- act as manufacturer’s outside sales force. Usually represent several manufacturers at the same time & operate in a wide range of product & service categories
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Distribution tasks performed by brokers*
Described as a go-between(somebody who brings together buyers & sellers to carry out transactions), the primary function of brokers is to provide market information. In practice however brokers perform many if not most of the distribution functions performed by manufacturers’ agents.
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Distribution tasks performed by commission*merchants
Physically hold inventories(but not taking title) Provide market coverage Sales contact Breaking bulk Credit Order processing All these tasks are performed on behalf of producers or manufacturers.
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Manufacturer’s sales branches & offices
Owned & run by manufacturers but are physically separated from manufacturer’s plants Primarily used to distribute manufacturer’s own products at wholesale.
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Retail Intermediaries
Business firms that engage in selling merchandise for personal or household consumption & rendering service incidental to the sale of such goods. Range from kiost (Semausu) to giant mass merchandise chains such as Wal-Mart, Spar, Pick n Pay, Choppies etc. Dominated by small retail outlets in developing countries .
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Growing power of retail
The power and influence of retailers have been growing in recent years. Due to Their increase in size and buying power. Application of advanced technologies Use of modern marketing strategies.
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Distribution tasks performed by retailers
Customer contact Personal selling, advertising & display Break bulk Storage Risk taking Information gathering & dissemination
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Facilitating Agencies
Business firms that assist in the performance of distribution tasks other than buying, selling and transferring title . Include: Transportation agencies Storage agencies Order processing agencies Advertising agencies Financial agencies Insurance agencies Marketing research firms
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Review Questions Describe the distribution tasks that wholesalers and Retailers are especially suited for performing. What are the main reasons for the growth of retail power in the marketing channel? Discuss the implications of this for channel management. Why do you suppose the average cost of performing many distribution tasks are lower for intermediaries than for producers & manufacturers.
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Consumer Channel structure
M to C (two levels) M to R to C (three levels) M to W to R to C (four levels) M to A to W to R to C (five levels) The channel structure reflects how the producers has allocated distribution tasks. Multi channel structure –means that the producer has chosen to reach its customers through more than one channel.
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Channel structure for business markets
M to BC (Direct sales using sales reps, direct marketing, direct mail, telemarketing M to BD to BC (Business distributors include Brokers, retail outlets, dealers) M to MR to BD to BC
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Marketing channels for services
Producer to User (Consumer or Business or Institution or Government) Producer to Agents or brokers to user Producer to services retailers to user
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Review questions Identify & explain the major channels open to a producer of consumer/industrial products. Discuss the concept of specialization and division of labor as it applies to marketing channels. Discuss the relationship between marketing channel strategy and marketing mix. Why have marketing channels enjoyed increased attention in marketing as a strategic area for competing in the market? Why is it difficult to develop a truly optimal channel structure?
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Distribution Structure Decisions
Intensity –Intensive, selective or exclusive distributions Competitive strategy- cost leader, differentiation or focus strategy Multichannel Distribution Systems Vertical marketing systems (VMS)– corporate , contractual, alliance & administered form of VMS. Franchising
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Distribution Intensity
Intensity- the number of intermediaries at each level of the marketing channel. Intensive (Saturation) distribution -producer uses as many outlets as possible at each level of the channel. Selective distribution- not all possible intermediaries at a particular level are used but only a select few. Exclusive distribution- Only one or very limited number of outlets are given exclusive rights to distribute the product.
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Competitive strategy Cost leadership- producing and distribution products at the lowest cost per unit to target customer segments that are price sensitive Differentiation strategy – emphasizing uniqueness in the way that the product is distribute targeting customers with unique needs . Focus strategy- concentrating on a particular market segment (niche) in an industry
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Multichannel Distribution Systems
A single firm sets up two or more marketing channels to reach ore or more customer segments. Offers opportunity to expand sales & market coverage and to tailor products to the specifics needs of diverse customer segments. However, it is difficult to maintain control , and can generate conflict as more channels compete for customers and sales .
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Vertical Marketing Systems (VMS)
VMS –a unified system of producers, wholesalers and retailers under the ownership of one channel member . Corporate - production and distribution facilities are owned by the same company. Contractual –independent channel members are linked by formal contractual agreement. E.g. franchise Administered – one dominant channel members assumes leadership of the chain.
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Franchise An arrangement between the franchisor & franchisee that allows the latter to use the trademark (or name) and system of business of the former. The most common form of contractual VMS. Three types: manufacturer-sponsored retail franchise system Manufacturer-sponsored wholesale franchise system. Service-firm-sponsored retailer franchise system
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Review Questions What is a franchise? Discuss the different types of franchise organizations. What is intensive distribution? Discus the implications of decisions about distribution intensity on channel and marketing strategy. Discuss the advantages and disadvantages of selective and Exclusive distribution. Under what firm and market conditions would you choose intensive, selective or exclusive distribution and why?
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Marketing Channel Environment
Marketing channels operate in a continuously changing environment. Thus channel managers need to be sensitive to the environment in order to develop effective channel strategies. Here we consider the following elements of marketing environment: Economic environment Competitive environment Socio-cultural environment Technological environment Legal Environment
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The economic environment
Economic factors have a pervasive influence on the behavior of channel members. These include: Recession Inflation Interest rates Currency Budget deficit
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The competitive Environment
Marketing channel managers need to pay close attention to existing and emerging competitors both locally and globally. Channel managers must consider also the major types of competition that can affect channel strategy: Horizontal competition Intertype competition Vertical competition Channel system competition
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The socio-cultural Environment
The socio-cultural environment pervades al aspects of society including marketing channels. The major socio cultural variables that can influence channel strategy include: Age patterns of the population Ethnic mix of the population Education trends Family or household structure Changing role of women
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The technological Environment
Technology is the most rapidly changing aspect of the marketing channel environment. Examples include: The internet Scanners, computerized inventory management & portable computers Electronic Data Interchange (EDI) 3-D modeling Mobile Robot
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The legal Environment The legal environment include the set of laws that impact on marketing channels . These laws relate to the following issues amongst others: Antitrust (Anti-competition) Exclusive dealing Dual (multi-channel ) distribution Full-line forcing Price discrimination
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Legal issues cont… Price maintenance Refusal to deal
Resale restrictions Tying agreements Vertical integration
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Physical Distribution (Logistics)
Physical distribution (Logistics):-the planning , implementing and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer’s needs at a profit. (Kotler). Include flow of information & money Supply chain management(demand chain planning) –logistical systems that emphasize close cooperation & comprehensive inter-organizational mgt to integrate the logistical operations of different firms in the channel.
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Rationale of logistics
The movement of the right amount of the right products to the right place at the right time. In an increasingly diverse market (in terms of consumer segment) spread over large geographic areas, getting the right amount of products to the right place at the right time can be very complex and expensive. Specialized firms which perform most ,if not all, of the logical tasks that would normally be performed by a channel member are needed to deal with this problem.
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Objective To reduce the total cost associated with logistics management. Inventory related costs Transportation costs Order processing & administration costs Increase customer service Order lead time Dependability Convenience Inventory availability
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Components of logistics
Transportation Materials Handling Order processing Inventory control Warehousing Packaging
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Transportation The overriding issue is choosing the optimum mode of transportation to meet customer service demands . Factors to consider include: Capability Costs Specific transportation services offered Reliability of carriers The modes of transport available Accessibility Time
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Modes of transportation
Rail transport Road transport Air transport Pipelines Water transport
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Materials handling Range of activities and equipment involved in the placement and movement of products in and out of storage areas. How to minimize the distance products are moved within the warehouse What kind of mechanical equipment should be used How to make the best of labor when receiving, handling & shipping products.
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Materials handling cont…
An effective materials handling moves inventory into, within and out of the warehouse quickly with minimum handling. Manual materials handling system increases potential for damage. Automated materials handling is more efficient. Why?
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Inventory Management Decisions designed to maintain optimal level of stock or inventory. Keeping too little stock : Risk not having products when needed by customers Gives rise to costly emergency shipments or production Keeping too much stock: Increases stock-carrying costs. Increases stock obsolescence
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Determinants of reorder point
Order lead time- the time between the order being placed and the goods being received by the customer. Usage rate – the rate at which inventory is being used or sold during a specific period. Safety stock- the stock kept in order to prevent stock-outs. Reorder point=(order lead time X usage rate) +safety stock
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Reorder point -example
If order lead time is four days, the usage rate is 100 units per day and the safety stock is 200 units, what is the reorder point? Reorder point = (4x100) +200 =600 units.
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Economic Order Quantity (EOQ)
The most cost effective order quantity. Determined by inventory carrying costs and order processing costs. Inventory carrying costs include warehousing costs, financing costs, interest, insurance costs and depreciation costs. Order processing costs include order placing costs, follow-ups, receipt of order, quality control, and payment processing.
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EOQ –example in the textbook
Suppose we have the following: Annual demand = units Ordering cost= P200 per order Unit cost = P25 Inventory carrying cost = 20% of annual Inventory investment. EOQ =√ (2* *200)/25*0.2 = 4000 units. The optimal number of order per year = /4000=50 What are the limitations of EOQ model?
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Warehousing Holding of stock until it is ready to be sold .
Location of facilities Number of warehousing units The design of the units Size of the units Ownership
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Types of warehouses Private warehouses- privately owned
Public warehouse – government owned Distribution centers
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Packaging The cost of packaging of products are related to:
Transport costs- Materials handling costs- labor costs Order processing costs – admin costs, stationery costs etc Inventory carrying costs e.g. damage
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Developing the marketing channel strategy
how the firm expects to achieve its distribution objectives for its target market (s) concerned with the place aspect of marketing strategy. narrower than the marketing strategy which includes the promotion, pricing and product strategies.
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The major channel strategy decisions
The role of distribution in the firm’s overall objectives and strategies The importance attached to distribution relative to other elements of the marketing mix The way channel members should be selected, managed and evaluated.
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Designing the marketing channel
Channel design. Decisions involved in either developing a new marketing channel or modifying existing channel (s)
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Steps in channel design
Recognize the need for a channel design decision. Setting & coordinating distribution objectives Specifying the distribution tasks Developing possible alternative channel structures Evaluating the variables affecting channel structure Choosing the “best” channel structure Selecting the channel members
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Recognize the need for a channel design decision
Situations that can indicate a need for a channel design decision include: Developing a new product or product line Aiming an existing product at a new target market Making a major change in the other components of the marketing mix e.g. new pricing policy Establishing a new firm Opening up new geographic marketing areas(territories) Facing a major environmental change etc
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Setting & coordinating distribution objectives
Three key task are Study the objectives & strategies in the other marketing mix areas and other relevant objectives & strategies of the firm. Set distribution objectives & state them explicitly Check to see if the distribution objectives set are congruent with marketing and other general objectives & strategies of the firm.
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Specifying the distribution tasks
Examples of distribution tasks include Gathering information on target market shopping patterns Promoting product availability in the target market Compiling information about product features Maintaining inventory storage to assure timely availability Transport the product Arrange for credit provisions Processing & filling specific customer orders etc
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Developing possible alternative channel structures
Number of channel levels Most common examples include two, three or four levels Intensity at the various levels The number of intermediaries at each level Types of intermediaries at each level Examples include wholesalers, retailers,
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Evaluating the variables affecting channel structure
Market variables Market geography, size, density & behavior. Product variables Bulk & weight, perishability, Unit value etc Company variables Size, financial capacity, expertise, objectives etc Intermediary variables Availability, cost, services etc Environmental variables Behavioral variables
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Selecting channel members
Three steps: Find prospective channel members Apply selection criteria to determine suitability of channel members. Secure channel member
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Sources of prospective channel members
Trade shows Customers Fields sales people Trade sources Advertising others
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Selection criteria Years in business (experience) Other lines carried
Growth (sales ) & profit record Management ability Size Cooperativeness Reputation Market coverage Attitude
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Managing the marketing channel
Motivation Evaluation Product/ pricing/promotion issues in channel mgt.
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Motivating Channel Members
Rationale- not only does the company sell through the intermediaries but it also sells to and with them. Three basic facets in channel member motivation are: Finding out the needs & problems of channel members Offering support to the channel members that is consistent with their needs and problems. Providing leadership
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Finding out the needs & problems of channel members
Main approaches: Research studies of channel members conducted by the manufacturer. Research studies of channel members conducted by third parties Marketing channel audit conducted by the manufacturer. Distributor Advisory Councils established by the manufacturer.
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Offering support to the channel members
Three categories: Cooperative arrangements Partnerships or Strategic alliances Distribution programming
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Cooperative Arrangements
Cooperative arrangements between the manufacturer & channel members at the wholesale & retail levels are many & varied. Rationale – to provide incentives for getting extra effort from channel members in the promotion of the manufacturer’s products.
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Common examples of cooperative arrangements
Cooperative advertising Payments for window display space & installation costs. Store or distributor name mention in manufacturer’s advertising Payments for interior designs including shelf-extender, aisle display etc Payments for store fixtures
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Success factors in cooperative arrangements
Must address the specific needs and problems of the channel member Must be simple and straight forward with no complex rules and procedures to follow. Must convey a clear sense of mutual benefits to both the manufacturer and the distributors.
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Partnerships/Strategic alliances
A continuing and mutually supportive relationship between the manufacturer and its channel members in an effort to provide a highly motivated team, network or alliance of channel partners. Rationale –replaces the traditional “us-against-them””mentality with the “us” in channel member relationships.
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Basic principles for building successful channel partnerships
Must be mutually beneficial . Must be based on mutual respect Must be achievable –promise only what you can deliver. Must seek to achieve specific objectives. Must seek to build Long lasting relationships Each party must keep open all lines of communication All key decisions must be made together.
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Distribution programming
A comprehensive set of policies for the promotion of a product through the channel. Goes beyond the typical partnership or strategic alliance. Deals with virtually all aspects of the channel relationship. A comprehensive approach for achieving a highly motivated channel team .
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Distribution programming-benefits
A professionally planned, developed and managed program A joint effort between manufacturer and the channel members , incorporating the needs of both. Offers the advantages of a vertically integrated channel while at the same time allowing channel members to maintain their status as independent business firms.
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Examples of Distribution Programming
BMW–developed a distribution program for its “Certified Pre-owned” cars with its independent auto dealers to meet the growing challenge of selling the large fleet of used cars on dealers’ slots. Included in the program are BMW’s $20M annual expenditure on TV ads, special financing arrangements, meticulous mechanical inspection of vehicles, special warranty provisions and virtually all every other detail. McDonald’s in fast food -specifies exactly how a McDonald’s restaurant should be designed and precisely what it can and cannot have in it.
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Provide leadership Provide leadership on a continuing basis bearing in mind the following challenges which characterize the inter-organizational setting of the marketing channel: The looseness of the organization of many channel systems. A tendency by channel members to avoid being directed. Lack of single ownership No clear demarcation of superior-subordinate relationships .
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Evaluating Channel Member Performance
Factors determining the scope & frequency of evaluation: Degree of control Importance of channel members Nature of the product Number of channel members
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Channel member performance audit
Three phases: Develop performance measurement criteria. Evaluate channel members against criteria Take corrective actions in needed Common criteria: Sales performance Selling capabilities Attitudes of channel members Competition against other intermediaries/from other product lines carried by the channel member. General growth prospects
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Measure performance against criteria
Three approaches: Separate performance evaluations on one or more criteria Multiple criteria informally to evaluate overall performance qualitatively Multiple criteria combined formally to arrive at a quantitative index of overall performance
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Take correction actions if need be.
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Conflict in the marketing Channel
A situation where a channel member(s) perceives another member(s) as a threat. inherent & pervasive in any channel Channel conflict builds over time Channel conflict can lead to open hostility. Channel conflict can be resolved Can have both negative and positive effect on the channel
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Causes of channel conflict
Oversaturation Stocking levels Competition Sales quotas Overselling Pricing issues Scarce resources
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Problem solving/ joint goal setting Persuasion Negotiation
Mediation & arbitration Judicial appeal Politics Coalitions Lobbying
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Power in the Marketing Channel
The capacity of a particular channel member to control or influence the behavior of another channel member (s) Five forms of power: Reward power Coercive power Legitimate power Referent power Expert power
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How to use power to influence channel member behavior
Promise - reward power Threaten – Coercive Legalistic – Legitimate Request –Referent, reward, coercive Information exchange –expert, reward Recommendation – expert, reward
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Electronic Marketing Channel (EMC)
EMC is the use of the internet to make products and services available to the target market . EMC has the capacity to link producers and final consumers directly Key question is whether EMC provide a substitute for convention channel structure involving physical stores and shopping malls?
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Developments & trends in EMC
Online shopping developed from nothing in the mid 1990s to a $36billion industry in 2002. Online shopping has become a routine channel choice for a wide range of products . The number of consumers using online shopping has increased substantially in recent years. Although consumers of all ages shop online, the highest percentages are in the range
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Advantages of EMC Global scope and reach
Convenience/rapid transaction processing Information processing efficiency & flexibility Lower sales & distribution costs Data based management and relationship capabilities.
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Disadvantages Lack of contact with actual products and delayed possession Security concerns of customers Non-purchase motives for shopping no addressed Clutter, confusion, and cumbersomeness of the internet Fulfillment logistics not at internet speed or efficiency.
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International channel perspectives
International channel environment Behavioral processes in international channels Designing international channels Motivating international channel members
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International channel environment
Economic factors Competitive environment Socio-cultural environment Legal/political environment
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Behavioral processes Same issues as in domestic channels.
Cultural awareness needed in managing conflict and using power.
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Designing international channels
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