Chapter 6Chapter 6

Designing the Marketing Channel

• Channel Design– Decisions involving either the development of new

marketing channels where none had previously existed or the modification of existing channels

• Important points:1. A decision made by the marketer2. The creation or modification of channels3. The active allocation of distribution tasks in an

attempt to develop an efficient structure4. The selection of channel members5. A strategic tool for gaining a differential

advantage

Channel DesignChannel Design66Objective 1:

Who Engages in Channel Who Engages in Channel DesignDesign

66Objective 2:

• Manufacturers:– Includes also service providers and franchisors

– Must look down the channel toward the market

• Wholesalers– Must look both up and down the channel

• Retailers– Must look up the channel to secure suppliers

Channel Design ParadigmChannel Design Paradigm66Objective 3:

• Seven (7) Steps to Consider:1. Recognize the need for channel design decision

2. Set & coordinate distribution objectives

3. Specify distribution tasks

4. Develop alternative channel structures

5. Evaluate relevant variables

6. Choose the “best” channel structure

7. Select channel members

When to Make aWhen to Make aChannel Design DecisionChannel Design Decision

66Objective 4:

• Developing a new product or product line

• Aiming an existing product at a new market

• Making a major change in some other component of the marketing mix

• Establishing a new firm

• Adapting to changing intermediary policies that may inhibit attainment of distribution objectives

• Dealing with changes in availability of particular kinds of intermediaries

• Opening up new geographic marketing areas

• Facing the occurrence of major environmental changes

• Meeting the challenge of conflict or other behavioral problems

• Reviewing and evaluating existing members’ performance

Distribution ObjectivesDistribution Objectives66Objective 5:

• Setting distribution objectives requires knowledge of which, if any, existing objectives & strategies may impinge on these new distribution objectives.

The Need for CongruencyThe Need for Congruency66

• Holistic approach is needed…– Distribution is often really a facilitator for achieving the

firm’s other objectives• Product marketing• Price marketing• Promotion marketing

– And the firm’s marketing mix objectives are derived from the firm’s overall objectives an strategies.

• A change in one area is likely to affect all other areas.

Distribution TasksDistribution Tasks66Objective 6:

• Outlining distribution tasks is highly idiosyncratic and situationally specific– i.e., Tasks are a function of the distribution objectives

and the firms involved

• 8 marketing functions are as specific as one can get on any generalizable scale*– Note the 8 functions though represent general

categories which your text’s task all fall under*

Channel Structure Channel Structure DimensionsDimensions

66Objective 7:

1. Number of levels

2. Intensity at each level Control (for mgmt & image)

3. Types of intermediaries

at each level

Number of LevelsNumber of Levels66

• Often ranges from two (i.e., manufacturer and customer) to five or more

• Number of alternatives is often limited to two or three choices because of factors like:

1. Particular industry practices (e.g., automobiles)

2. Nature & size of market

3. Availability of intermediaries

Intensive Selective Exclusive

Many Few One

Intensity Dimension

Numbers of Intermediaries (retail level)

Positive relationship between the intensity of thedistribution dimension & number of intermediaries used

(in a given market area)*

Intensity at Various LevelsIntensity at Various Levels66

Types of IntermediariesTypes of Intermediaries66

• Numerous types– E.g., retailers, wholesalers, A/Bs, etc.

• Manager’s emphasis should be on the types of tasks performed by each & what’s needed

• Must be aware of emerging types:– Electronic online auctions for consumers (e.g., eBay)– Electronic markets for industrial goods (converge.com)– Demand collection channels (priceline.com)*

Variables AffectingVariables AffectingChannel StructureChannel Structure

66Objective 8:

• Categories of variables:1. Market variables

2. Product variables

3. Company variables

4. Intermediary variables

5. Environmental variables

6. Behavioral variables

Market VariablesMarket Variables66

• Market geography– Location, geographical size, & distance from producer

• Market size– Number of customers in a market

• Market density– Number of buying units (consumers or firms) per unit of

land area

• Market behavior– Who buys, & how, when, and where customers buy

Product VariablesProduct Variables66

• Bulk and weight

• Perishability

• Unit value

• Degree of standardization

• Technical vs. nontechnical

• Newness

Company VariablesCompany Variables66

• Size– Larger often confers greater “power bases”

• Financial capacity– Greater capital lessens dependency

• Managerial expertise– Increases dependency on others’ expertise

• Objectives & strategies– Particulars may limit alternatives

Intermediary VariablesIntermediary Variables66

• Availability– Positively related to length

• Cost– Negatively related to length

• Services (available from intermediaries)– Positively related to use

Environmental VariablesEnvironmental Variables66

• Economic

• Sociocultural

• Competitive

• Technological

• Legal

*reference Ch. 3 for effects*

Behavioral VariablesBehavioral Variables66

• Develop congruent roles for all channel members

• Be aware of members’ “power bases”

• Manage communication channels to minimize possible conflict

*reference Ch. 4 for effects*

• Heuristics– Rules of thumb

• Benefits– Fairly simple prescriptions for channel structure

• Limitations– Mostly useful as a rough guide to decision-making

Heuristics in Channel DesignHeuristics in Channel Design66Objective 9:

Choosing an OptimalChoosing an OptimalChannel StructureChannel Structure

66Objective 10:

• Why is management incapable of choosing an optimal channel structure?– All possible outcome alternatives are unknown

– Precise methods for calculating the exact payoffs associated with each alternative structure do not exist

• Which is why we assume with the use of heuristics & why tacit knowledge is so important…

Approaches for ChoosingApproaches for Choosinga Channel Structurea Channel Structure

66Objective 11:

• Some techniques for enhancing our channel design decisions include the:– “Characteristics of Goods & Parallel

Systems” Approach– Financial Approach– Transaction Cost Analysis Approach– Management Science Approaches– Judgmental-Heuristic Approach*

Judgmental Heuristic Judgmental Heuristic ApproachesApproaches

66Objective 12:

• Assuming that management’s ability to make judgments is high, and good empirical data on costs & revenues exists

then…

• It’s possible to make satisfactory channel design choices using the judgmental-heuristic approach

Judgmental Heuristic Judgmental Heuristic ApproachesApproaches

66

• 3 General Approaches:

1. Straight Qualitative Judgment Approach

2. Weighted Factor Score Approach

3. Distribution Costing Approach*