1. DESIGNING CHANNEL SYSTEMS 21st February 2008

2. Channel Strategy Defined
Marketing strategy :
The broad principles by which the business unit expects to achieve its marketing objectives in a target market
Marketing Channel Strategy :
The broad principles by which the firm expects to achieve its distribution objectives for its target market(s).

3. Basic Distribution Decisions
What role should distribution play in the firm’s overall objectives and strategies?
What role should distribution play in the marketing mix?
How should the channels be designed to achieve the distribution objectives?
What kinds of channel members should be selected?
How can the marketing channel be managed to implement the firm’s channel design effectively?
How can channel member performance be evaluated?

4. What role should distribution play in the firm’s overall objectives and strategies?
How much priority to place on distribution is one that can be answered only by the particular firm involved.
Experts are of the opinion that distribution warrants the attention of top management.

5. Marketing Channel Strategy and the Marketing Mix
A general case for stressing distribution strategy can be made if any one of certain conditions prevail :
Distribution is the most relevant variable for satisfying target market demands
Parity exists among competitors in the other three variables of the marketing mix
A high degree of vulnerability exists because of competitors neglect of distribution
Distribution can enhance the firm by creating synergy form marketing channels

6. Relationship between Channel Strategy and Design
A straightforward relationship :
Channel Strategy should guide Channel Design
so as to help the firm
attain a differential advantage
Also called sustainable competitive advantage
(i.e., the firm’s ability to use its particular strengths to satisfy
customer demands better than its competitors on a long term basis)

7. Positioning the Channel to Gain Differential Advantage
Channel position
is the reputation a manufacturer acquires among distributors
for furnishing products, services, financial returns, programs and systems that are in some way superior to those offered by competing manufacturers.

8. What is Channel Design?
Channel design refers to those decisions involving the development of
new marketing channels where none had existed before, or
to the modification of existing channel

9. Channel Design Decision
Seven steps :
Recognizing the need for a channel design decision
Setting and 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

10. Step 1 : Recognizing the need for a Channel Design Decision
Situations which may indicate the need for a channel design decision :
Developing a new product/product line
Aiming an existing product at a new target market
Making a major change in some other component of the marketing mix
Establishing a new firm
Adapting to changing intermediary policies
….2

11. Step 1 : Recognizing the need for a Channel Design Decision
Dealing with changes in availability of particular kinds of intermediaries
Opening up new geographic marketing areas
Major environmental changes
Meeting the challenge of conflict
Reviewing and evaluating

12. Step 2 : Setting and Coordinating Distribution Objectives
To set distribution objectives that are well coordinated with other marketing and firm objectives, the channel manager must :
Become familiar with objectives and strategies for the other marketing mix areas
Set explicit distribution objectives
Check to ensure the distribution objectives set are congruent with marketing and other general objectives and strategies of the firm.

13. Step 3 : Specifying the Distribution Tasks
In the macro context the distribution tasks are the “marketing flows”
The job of the channel manager in outlining distribution functions or tasks is much more specific.

14. Step 4 : Developing Possible Alternative Channel Structure
The alternatives (channel structures) should be in terms of the following dimensions :
Number of levels
Intensity of the various levels
Types of intermediaries
Number of possible channel structure alternatives

15. Step 5 : Evaluating the Variables Affecting Channel Structure
There are a myriad of variables that influence channel structures, but six basic categories are the most important :
Market variables
Product variables
Company variables
Intermediary variables
Environment variables
Behavioral variables

16. Step 6 : Choosing the “Best” Channel Structure
In reality, choosing an optimal channel structure, in the strictest sense of the term, is not possible. Because :
Management is not capable of knowing all the possible alternatives
Precise method do not exist for calculating the exact payoffs associated with each of the alternative structures.
Nonetheless, some pioneering attempts at developing more exact methods do appear in literature

17. Aspinwall Approach* (“Characteristics of Goods and Parallel Systems” Approach)
Places main emphasis on product variables, arguing that all products may be described in terms of the following characteristics :
Replacement rate
Gross margin
Adjustment
Time of consumption
Searching time
*Developed by Leo Aspinwall in 1958

18. Aspinwall’s Color Classification
Red goods : high replacement rates, low on others
Orange goods : medium values on all five characteristics
Yellow goods : low on replacement rate, but higher values for the
other characteristics

19. Relationship between Product Characteristics and Length of Marketing Channels
RED
ORANGE
YELLOW
Products
Channels

20. Financial Approach*
Choosing an appropriate channel structure is analogous to an investment decision of capital budgeting.
Involves comparing estimated earnings on capital resulting from alternative channel structures in the light of cost of capital.
The use of capital for distribution must also be compared to the alternative of using the funds in manufacturing operations.
*Developed by Eugene W Lambert in the 1960s

21. Financial Approach
Useful as a reminder of the importance of financial variables in choosing a channel structure.
This perspective is very appropriate because channel structure decisions are usually long term ones compared with the other decision areas of the marketing mix.

22. Problems in making the Financial Approach Operational
Difficult to obtain accurate estimates of future revenues and costs from alternative channel structures
Given the number of variables that can affect channel relationships, especially when independent intermediaries are involved, can make the task even more difficult.

23. Transaction Cost Analysis Approach* (TCA)
Main focus is the cost of conducting transactions necessary for a firm to accomplish its distribution tasks.
Transaction costs are essentially the costs associated with performing tasks such as gathering information, negotiating, ordering, etc….
*Based on the work of Oliver E Williamson in the mid 70s

24. Transaction Specific Assets
For transactions to take place, transaction specific assets are needed.
Tangible
Such as store fixtures, special equipment
to service the product
Transaction
Specific
Assets
Intangible
Such as special product knowledge or
selling skills to help project the high
quality of the product

25. Transaction Specific Assets and Channel Structure
According to Williamson :
If asset specificity* is high, then the manufacturer would probably be better off doing everything himself
Reason : people behave opportunistically
i.e., If independent channel members control most or all of the transaction specific assets, they will know they are virtually indispensable and will demand terms that are skewed heavily toward their own self interest, thereby increasing transaction costs for the manufacturer to uneconomic levels.
*Asset specificity is high in the sense that these assets would require a high
Investment and have little or no value outside the channel

26. Judgmental – Heuristic Approaches
These approaches rely heavily on managerial judgment and heuristics (rule of thumb)
Three common approaches:
Straight Qualitative Judgment Approach
Weighted Factor Score Approach
Distribution Costing Approach
There are variations in the degree of precision of the various approaches.

27. Straight Qualitative Judgment Approach
* Crudest, but most commonly used
* The various alternative channel structures are evaluated in terms of decision factors that are thought to be important.
These may include such factors as :
Short and long run costs/profits/channel control issues/long term growth potentials/security of business/etc.
An alternative is chosen that, in the management’s opinion, best satisfies the various explicit or implicit decision factors.

28. Weighted Factor Score Approach*
Consists of four steps ;
The decision factors on which the channel choice will be based must be stated explicitly
Weights are assigned to each of the decision factors in order to reflect their relative importance
Each channel alternative is rated on each of the decision factors
The overall weighted factor score is computed for each channel alternative
* Suggested by Philip Kotler

29. Weighted Factor Score Method applied to Channel Choice : Alternative 1

30. Distribution Costing Approach
Under this approach, estimates of costs and revenues for different channel alternatives are made, and the figures are compared to see how each alternative stacks up.
Assume 6,000 potential customers
Each customer requires a personal call every two weeks.
Each sales person can make 6 calls per day

31. Estimated Figures
….2

32. Estimated Figures Suppose distributors were used with the following
alternative trade margins offered by manufacturer
at the projected level of sales
….3

33. Direct versus distributor cost comparison :
Estimated Figures
Direct versus distributor cost comparison :

34. GAP ANALYSIS

35. Gap Analysis Framework
SOURCES
OF GAPS
CLOSING
GAPS
TYPES
OF GAPS
Demand-Side Gaps:
Offer tiered service levels
Expand/contract provision
of service outputs
Change segment(s) targeted
Environmental Bounds:
Local legal constraints
Local physical, retailing
infrastructure
Demand-Side Gaps:
SOS < SOD
SOS > SOD
Which SO(s) ?
Supply-Side Gaps:
Change flow responsibilities
of current members
Invest in new low-cost
distribution technologies
Bring in new channel
members
Managerial Bounds:
Constraint due to lack
of knowledge
Constraint due to
optimization at a
higher level
Supply-Side Gaps:
Flow cost is too high
Which flow(s)?
SOS – Service output Supply SOD – Service output Demand

36. Gap Analysis Framework Sources of Gaps
Environmental Bounds:
Local legal
constraints
Local physical, retailing
infrastructure
Managerial Bounds:
Constraint due to
lack of knowledge
optimization at a
higher level
&

37. Gap Analysis Framework TYPES OF GAPS
Demand-Side Gaps:
SOS < SOD
SOS > SOD
Which SO(s) ?
Supply-Side Gaps:
Flow cost is too high
Which flow(s)?
&
The service output is either
less than expected or in
excess of that expected
The Service output does not
match the requirements of
buyers
High cost performance of any of
the relevant channel flows

38. Types of Gaps No Gaps COST PERFORMANCE LEVEL Demand Side Gap
SOD > SOS No
Demand Side Gap
SOD = SOS
Demand Side Gap
SOD < SOS No
Supply Side Gap
(Efficient
Flow Cost)
Proposition
suitable
for less
demanding
segment No
Gaps
Proposition
suitable
for a more
demanding
segment
Supply Side Gap
(Inefficiently
high flow cost)
Insufficient SO
provision, at high
costs: price or
cost too high,
value, too low
High costs,
but SOs are right :
value is good,
but price is
too high
High costs and
SOs too high:
No extra value
created, but price
or cost is high

39. Gap Analysis Framework CLOSING GAPS
Demand-Side Gaps:
Offer tiered service levels
Expand/contract provision
of service outputs
Change segment(s) targeted
Supply-Side Gaps:
Change flow responsibilities
of current members
Invest in new low-cost
distribution technologies
Bring in new channel
members
&

40. That’s all for today!!!