1. Chapter 6
Designing the Marketing Channel**

2. Major Topics for Ch. 6 Channel Design Paradigm (7 steps)**
Channel Goals**
Properties of Channel Tasks (Functions)**
Three Dimensions of Channel Structure**
Two Approaches for Choosing a Channel Structure**
Three Analysis Steps to Consider for Selecting the Best Channel**

3. Channel Design Channel Design:
Topic 1: 6
Channel Design
Channel Design:
Decisions involving the development of new marketing channels either where none had previously existed or to the modification of existing channels

4. Channel Design A decision made by the marketer6
Key points of the definition include:
A decision made by the marketer
The creation or modification of channels
The active allocation of distribution tasks in an attempt to develop an efficient structure*
The selection of channel members*
A strategic tool for gaining a differential advantage

5. Who Engages in Channel Design?*6
Who Engages in Channel Design?*
Firms
Wholesalers
Retailers
• Look up the
channel
to secure
suppliers
• Producers,
manufacturers, service
providers, franchisors
• Look down the
channel
toward the market
• Look both up and
down
the channel
* Who is missing here?

6. Channel Design Paradigm** (Seven Steps)6
Recognize the need for
channel design decision
7. Select
channel members
2. Set & coordinate
distribution objectives
6. Choose the “best”
channel structure
3. Specify
distribution tasks
5. Evaluate
relevant variables
4. Develop alternative
channel structures*

7. Distribution Objectives (Goals)
Topic 2 6
Distribution Objectives (Goals)
Setting distribution objectives requires knowledge of which objectives & strategies may impinge on these distribution objectives.

8. Three Channel Goals*
Efficiency: “no better alternative is available that is universally preferred”
Control vs. Flexibility
Internal Cohesiveness vs. External Adaptiveness
Learning and Knowledge
* Intermediate Goals

9. Distribution Channel Tasks (Functions)
Topic 3 6
Distribution Channel Tasks (Functions)
Outlining distribution tasks is specific
and situationally dependent on the firm.
For example: Distribution tasks for a
manufacturer of consumer products
differs from those for industrial products. =
Distribution tasks are a function of the distribution objectives and the types of firms involved.

10. Channel Tasks (Functions)*
This is a generic list of functions!
Major Channels Functions (Tasks)
Physical Possession
Ownership
Promotion
Negotiation & Pricing
Financing
Risking
Order Processing
Payment Collection

11. Properties of Channel Tasks (Functions)**
Usually performed better through specialization
Can be shifted among channel members
Invariably use someone’s resources*
Key Question: Who can do the best job?
 Matching!

12. Costs Associated with channel functions
Physical Possession: Storage and delivery cost
Ownership: inventory carrying cost
Promotion: personal selling, advertising, sales promo, PR
Negotiation: time and legal cost
Financing: credit terms, terms and conditions of sale
Risk Taking: warranty, insurance, repair
Ordering: order-processing cost
Payment: collection, bad debt cost

13. Allocating Five Marketing Functions in an Automobile Channel*
Exhibit 3.1
Suppliers
Physical Function
Title Function
Payment Function
Customer
Transporters Warehouses
Manufacturer
Dealers
Transporters
Banks
Transporters Warehouses Banks
Transporters Banks
Advertising Agency
Customer
Customer
Information Function
Customer
Promotion Function
Customer
Advertising Agency
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14. Role Classifications for Different Types of Wholesalers
Take Physical Possession
Take Title to Goods
Negotiation Function Performed
Promotional Function Performed
Merchant Wholesaler
Manufacturer’s Sales Organization
Agents/Brokers
Commission Merchants
Yes Yes Yes Yes
No Yes Yes Yes
No No Yes Yes
Yes No Yes Yes
Exhibit 2.3

15. Three Dimensions of Channel Structure*
Topic 4 6
Three Dimensions of Channel Structure*
1. Number of
levels in the channel
2. Intensity at the
various levels
Allocation Alternatives
3. Types of
intermediaries
at each level

16. The Elements of Channel Design**
Three Dimensions of Design Variation:
Number of levels in the channel.  Channel Level Issue
Number of intermediaries at each level.  Channel Intensity Issue
Types of intermediaries used at each level.  Channel Ownership and function issue
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17. 1. Number of Channel Levels6
Range from zero to five or more
Number of alternatives is limited
Limitations result from the following factors:
Particular industry practices
Nature & size of the market
Availability of intermediaries

18. Consumer Channel Design
Producer
Zero-level
One-level
Two-level
Three-level
Consumer
Retailer
Wholesaler
Agent
Number of Levels
Exhibit 3.2
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19. Industrial Channel Design
Manufacturer
Zero-level
One-level
Two-level
Three-level
Industrial
User
Distributor
Manufacturer’s Representative
Number of Levels
Manufacturer’s Salesforce
Exhibit 3.2
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20. 2. Intensity at the Various Channel Levels6
Relationship between the intensity of distribution
dimension & number of retail intermediaries used in a
given market area
Intensity Dimension
Intensive Selective Exclusive
Numbers of Intermediaries (retail level)
Many Few One

21. 3. Types of Channel Intermediaries6
3. Types of Channel Intermediaries
Numerous types*
Manager’s emphasis on types of distribution tasks performed by these intermediaries
Watch emerging types
Electronic online auction firms (eBay)
Industrial products sold in B2B markets
(Chemdex, Converge.com)
Converge: electronic components

22. Channel Ownership and Function: Types of Intermediaries
Manufacturer’s own sales force (direct)
Online channel (direct)
Manufacturer’s representatives (indirect)
Industrial distributors (indirect)
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23. Variables Affecting Channel Structure6
Variables Affecting Channel Structure
Categories of Variables
Market Variables*
Product Variables*
Company Variables*
Intermediary Variables
Environmental Variables

24. 1. Market Variables Market Geography Location, geographical size,6
Market Geography Location, geographical size,
& distance from producer
Market Size Number of customers in a
market
Market Density Number of buying units
(consumers or industrial firms)
per unit of land area
Market Behavior Who buys, & how, when, and
where customers buy

25. Degree of Standardization Technical versus Nontechnical Newness
2. Product Variables 6
Bulk & Weight
Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness

26. 3. Company Variables Size The range of options is6
Size The range of options is
relative to a firm’s size
Financial The greater the capital, the
Capacity lower the dependence on
intermediaries
Managerial Intermediaries are necessary
Expertise when managerial experience
is lacking
Objectives Marketing & objectives may
& Strategies limit use of intermediaries

27. 4. Intermediary Variables6
Availability Availability of intermediaries
influences channel structure.
Cost Cost is always a consideration in
channel structure.
Services Services that intermediaries offer are closely related to the
selection of channel members.

28. 5. Environmental Variables6
Competitive
Economic
Sociocultural
The impact of environmental forces is
a common reason for making
channel design decisions.
Technological
Legal

29. How Do You Evaluate Alternative Channels?*
Channel Goals: Channel efficiency and effectiveness
Expected sales and costs*  value
Control and required resources
Flexibility
Learning and Knowledge
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30. Break-even Cost analysis: Company Sales Force and a Manufacturer’s Sales Agency
Costs
Manufacturer’s
Sales Agency
Company
Sales Force
Level of Sales Se
Sales Cost
Sales volume
Exhibit 3.3
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31. Various Approaches for Choosing Channel Structure
Topic 5 6
Various Approaches for Choosing Channel Structure
“Characteristics of Goods & Parallel Systems” Approach* (Table 6.2 on p. 207)
Financial Approach
Transaction Cost Analysis Approach*
Management Science Approaches
Judgmental-Heuristic Approach

32. “Characteristics of Goods & Parallel Systems” Approach*6
“Characteristics of Goods & Parallel Systems” Approach*
Characteristic
Red Goods
Orange Goods
Yellow Goods
Replacement
Rate
High
Medium
Low
Gross Margin
Adjustment
Time of Consumption
Searching Time
Ex) Yogurt Luxury Car

33. Transaction Cost Analysis (TCA)*
Focus: Acheiving Highest Economic Efficiency
Costs occur whenever firms perform channel “functions”
Fixed and variable components.
TCA states that firms should purse the most efficient channel arrangement based on cost avoidance.
“Make” = Direct channel
“Buy” = Indirect channel

34. The Continuum of Interfirm Exchange Format*
Franchise
Systems
Hierarchy
(Make)
Buying
Groups
Market Setting
(Buy)
* My latest thought on continuum

35. Key Assumptions and Dimensions of TCA**
Channel members negotiate, monitor, and enforce exchange aspects by considering:
Two assumptions
Bounded rationality
Opportunism
Three transaction dimensions
Uncertainty (Internal and External)
Specificity of assets
Frequency of transactions
Ex) Fashion Apparel (e.g., Nicole Miller)

36. Choosing Internal versus External Transactions*
Conditions for choosing “Make” (Internal = Using Your own salesforce or shop) over “Buy” (external = Using independent distributor):
A high level of environmental uncertainty should exist in the transaction cost assessment.
The assets involved should be highly specialized and unique to the exchange process.
The transaction should occur frequently.
Examples: Sherwin-Williams; Curtis Mathes
Third Breed: Clan Mechanism; Partial Integration

37. Judgmental-Heuristic Approaches6
Judgmental-Heuristic Approaches IF
Management’s ability to
make sharp judgments is high +
Good empirical data on costs
and revenues is available
It’s possible to make highly satisfactory channel-choice decisions using judgmental-heuristic approaches
Ex) Qualitative Judgment Approach
Weighted Factor Score Approach
Distribution Costing Approach

38. Three Steps To Take for Selecting the Best Channel Design*
Topic 6
Three Steps To Take for Selecting the Best Channel Design*
1. Analyzing Channel Objectives and Product Characteristics:
2. Analyzing Desired Channel (Service) Output Utilities:
3. Analyzing Market Behaviors and Segments
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39. 1. Analyzing Channel Objectives and Product Characteristics
Unit value: length
Standardization: length, intensity
Bulkiness: length
Complexity: length, intensity
Stage of Product Life Cycle: intensity, ownership
 Implications for level, intensity, and ownership and function
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40. 2. Analyzing Desired Channel Output Utilities
Lot size utility
Convenience (time/spatial) utility
Assortment/Variety Utility
Service utility
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41. 3. Analyzing Market Behaviors and Segments
Current and potential buyer behaviors:
Who is doing the buying?
Where,when and how end users buy:
Seasonal
Shopping from home
Knowledge of industry (and its language)
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