1. 1 Some Distribution Related Successes and Failures l A company whose exclusive dealer network was an enormous strength, but turned into a liability as consumer shopping patterns changed. l A company whose stock is up 20,000% since 1990, sales have grown at 54% per year, and in a commoditizing market. l A company which faces a class action for incompetent management from 200 of its franchisees; whose much hyped new product bombed on the market.

2. 2 The Role of the Traditional Distributor is Changing High Sales Volume Low Low High Customer Need for Value

3. 3 Relationships With Manufacturers Are No Longer Working %Agreeing Distb. Manuf

4. 4 Channel Control Strategy l Why intermediaries? l Channel Coordination l Factors Affecting Channel Choice

5. 5 Why Use Channel Intermediaries?

6. 6 Other Reasons l Customers buy baskets or “assortments” of goods. Economizes on the time cost of shopping. l Retail Service is most efficiently provided by an intermediary »faster check-out, product demonstration, after-sales service l Inventory carrying »Intermediaries provide inventory buffer and hedge against demand fluctuations for the manufacturers.

7. 7 Intermediary Functions

8. 8 Channel Control: Manufacturer Objectives l Manufacturers must find ways to maximize total channel profits. »Why? l The incremental profits can be used in two ways: »Absorbed by the manufacturer leaving the retailer or other down stream channel member no worse than before. »Shared with the channel members to reward them for providing better service. l The challenge is to get the retailers to “behave”.

9. 9 Problems with an Independent Channel l The lack of channel coordination : »Each member has own private interests or profits in mind. »National vs. Local perspective »Perspective is short-term profits. »Examples »“Free-Riding” McDonald’s franchisees in a region. »Manufacturer shirking on advertising and retailer on retail service. »Retailer pricing is either “too high” or “too low”.

10. 10 Contracts Help Achieve Coordination l Types of Contracts: »Exclusive dealers - high end clothing. »Provides incentives to manufacturers to invest in advertising and retailers to invest in service »Exclusive territories: - beer distributors, auto dealerships »Prevents free-riding of retail services »Quantity Forcing: - Auto companies »Ensures that the right level of price and retail service is provided. »Price Floors –Nintendo MAP and allowances. –Why Price Floors?

11. 11 Factors Affecting Channel Choice: Retail Competition Channel intermediaries shield manufacturers from excessive retail competition

12. 12 Factors Affecting Channel Choice: Role of Sales Volume l With growing IT expertise, many manufacturers and industries are moving from independent dealers to corporate distribution (e.g., Dell, Gateway, Apple)