8/10/2019 SDM - Part II - Mod. 4

1/41

Module IV

Channel Design &

Management

8/10/2019 SDM - Part II - Mod. 4

2/41

Distribution Strategy

The Andersen Consulting Distribution StrategyPyramid, focuses on answering the following strategicquestions:

Given the value proposition, who are the end

customers and, therefore, what are the distributionobjectives?

What channel structure will achieve these distributionobjectives at the lowest cost to serve?

How do we manage our physical network to achieveobjectives at lowest costs?

What processes and organisation structure will helpsustain the distribution networksperformance?

8/10/2019 SDM - Part II - Mod. 4

3/41

The Andersen Consulting Distribution Strategy Pyramid

Distribution

Objectives

STRATEGY

Channel

Design

Network

Strategy

STRUCTURE

Intermediate

Management

Warehouses

and Transport

Materials

Management

PROCESS

IT Policies and

Procedures

Facilities and

Equipment

Channel

Management

IMPLEMENTATION

8/10/2019 SDM - Part II - Mod. 4

4/41

Distribution objectives:

Influenced by the customer expectations

Defines the extent of time, place and possession utilitywhich the customer can

expect out of the channel network

The relative level of DDI and CDI will determine the extent of the opportunity to

actually extend distribution.

The Distribution Development Index (DDI) is defined as the availability of a

brand/category in the market relative to that of a benchmark brand/category. The

Category Development Index (CDI) is defined as the per capita consumption of the

category in that market relative to the national per capita consumption of the category.

Concentrate ondemand generationactivities

Concentrate onquality of distribution,service level,frequency etc.

Develop integratedsales andmarketing package

Extend distributionimmediately

High

Low

Distribution

Development

Category Development

Low High

8/10/2019 SDM - Part II - Mod. 4

5/41

5

Channel Design Factors

Product mix and natureof the product

Width and depthof market / outlet coverage planned

Long term commitmentsto channel partners

Level of customer serviceplanned

Cost affordableon the channel system

Channel control requirementsof the company

Channel Design Issues:

Activitiesrequired and who will perform

Activities relationship to service levels

Numberof channel members required and the relationship

between categories

Roles, responsibilities, remuneration and appraisalof

performance of channel members

8/10/2019 SDM - Part II - Mod. 4

6/41

Channel Design Process:

1) Segmentation: Grouping customers in similar clusters based on theirneeds. Ex.: Doctors, Chemists, Hospitals and nursing homes . Enables the

sales manager to plan for the kind of channel members needed.

2) Positioning : The sales manager decides the channel partner who is ideal

to meet the expectations of the segments., the number of each category &

the service objectives and flows for each channel partner.

3) Focus :The sales manager has to firmly decide which of the segments hewill service considering cost, the managerial talent available and otherconstraints. The competitive scenario also helps in this decision.

4) Development : At this stage the channel system is being put in place to

achieve the objectives. Select the best of the alternativesbased on cost,adaptability/flexibility to handle differenttypes of markets and changes inthe market conditions, volume and range to be handled, ability to manageand control & competitor benchmarking.

For modifying an existing channel, the gap between the ideal and the

existingis to be identified for remedial action.

8/10/2019 SDM - Part II - Mod. 4

7/41

Channel Design:

Patterns of Distribution:Determines the intensityof the distribution; Intensity decides the service levelprovided

Typesof distribution intensity:IntensiveSelectiveExclusive

Channel Levels:

Zero levelOne level

Two level

Marketing Channel Systems:

Vertical:Corporate

Administered

Contractual

Horizontal

Multi-channel

8/10/2019 SDM - Part II - Mod. 4

8/41

Vertical :Various parties like producers, wholesalers and retailers act as a unified system to avoidconflicts. Improves operating efficiency and marketing effectiveness

1) Corporate: Combinessuccessive stages of production and distribution under single

ownership Examples: Bata, Bombay Dyeing, Raymond, Sears, Goodyear, Suppliers of

food items could be also their own supplying firms - like Nilgiris

2) Administered: Co-ordinates distribution activities, Gains market power by dominating

a channel, Command high level of co-operation in shelf space, displays, pricing

policies and promotion strategies. Ex. Usually true of dominant brands like GE, Kodak,

Pepsi, Gillette, Coke and HLL in certain locations.3) Contractual : Independent producers, wholesalers and retailers operate on a contract

Ex. : Franchise organizations, Retailer co-operatives

Horizontal:

Two or more unrelated companies join together to pool resources and exploit an

emerging market opportunity. Examples: In-store banking in hotels/ big stores, Retailoutlets in petrol bunks, sale of Financial products in post offices

Multi Channel:Company uses different channels to reach / same or different market segments. Ex.: MostFMCG companies have separate networks for retail market and institutions,Pharmacompanies may use different channels to reach doctors, chemists and hospitals

8/10/2019 SDM - Part II - Mod. 4

9/41

Channel Management

Selecting Channel Partners:

Some of the methods employedto select channelpartners are: Sales peopleidentify prospects and talk to them

Press advertising(industrial goods)

Existing channel partners can give good references

Competitorschannel members for reference, not poaching

Selection Criteria:

Qualitative: willingness, confidence in company products,willingness to abide by company rules, building companyimage, innovativeness etc

Quantitative: financial status, infrastructure, location,present businesses, customer relationships, market standingetc

8/10/2019 SDM - Part II - Mod. 4

10/41

Selection Criteria Checklist Local presence

Financial soundness

Knowledge of the market-place

Contacts with target customers Appropriate reputation in the market

Shared values and aspirations

Sales area coverage

Competitive service skills

Complementary lines

Required skills and competence

Appropriate facilities for inventory, warehousing and transportation

Motivation to succeed

Capable of marketing support to the manufacturer

Capable of discharging the responsibilities

Appropriate ethical practice

Necessary leadership qualities.

8/10/2019 SDM - Part II - Mod. 4

11/41

Training Channel Members:

Market views channel member as part of the companyhe has to behave in a

like mannerhence training assumes significance

Training could be on the jobfield training or classroomtraining

Training is an ongoingprocess and covers:

Field training on how the markets are to be workedto achieve sales, collect

payments and ensure the right kind of merchandising Class room training on company products, competitionand how to tackle it togain market shares Special meetings for new product launches Submitting reportsand maintaining records Statutory compliance Care of company products Technical specificationsand answering FAQs of customers For technical and industrial productsrecognition of specs, installationprocedure, repair and maintenance and effective demonstrations Servicingof automobiles and other engineering products

8/10/2019 SDM - Part II - Mod. 4

12/41

Motivating Channel members:Continuous motivation required to achieve ambitious volume and growth

targets

Motivation includes:

Capacity building programs

Training

Promotions support

Marketing research support

Working with company personnel

Incentives

Use of the power bases brings diverse channel partners in line for effectiveimplementation

Channel members are dependenton each other. The power equations

between them keep them working together.

There are basically 5 typesof power basesreward, coercion, expert,

reference and legitimacy. 2 more can be considered as support and

competition.

Extent of dependencedefines the power base which is appropriate.

8/10/2019 SDM - Part II - Mod. 4

13/41

Power of Motivation

Rewardincentives for good performance

Coercionthreat of punishment for non-performance

Referentbenefit of sheer association with a

strong company Legitimatearising out ofa contract

Expertspecialized knowledge

Supportadditional benefitsfor betterperformers only

Competitioncreatedbetween channel partners

8/10/2019 SDM - Part II - Mod. 4

14/41

Channel Co-ordination

Channel system is well co-ordinated if eachmember understands his role correctlyandperforms it to help the system achieve its

customer service objectives.

In a co-ordinated channel:

Interestsof all channel members are protected

Actionsof all are in linewith overall objectives

Flows are streamlinedto desired customer serviceobjectives

Channel co-ordination is an on-goingeffort

8/10/2019 SDM - Part II - Mod. 4

15/41

Channel Relationships

Relationship Nature

Adhoc On going

Strategic

Relationship purpose

Operational

Alliance Partnering

Transaction Co-operative

8/10/2019 SDM - Part II - Mod. 4

16/41

Channel Conflicts Conflict is generated when actionsof any channel member

come in the way of the system achieving its objectives.

Situation of discord or disagreementbetween partners in thesame channel systemhas negative connotationsand is

driven more by feelings than facts

Conflict is part of any social systemgetting disparate entities

to work together as in a channel system is also one suchsocial unit

If any member feels that another is working in a manner as

to affect him, conflict results Each channel member wanting to pursue his own goals Each wants to retain his independence There are limited resourceswhich all of them want to utilise

in achieving their goals

8/10/2019 SDM - Part II - Mod. 4

17/41

Features of conflicts:Initially latent and does not affect the workingIs not normally possible to detect till it becomes disruptive

Reasons for Channel Conflict:Rolesnot defined properly

Allocation of scarce resourcesbetween members seem unfair to some

Differences in perceptionof the business environment

Future expectationsnot likely to materialize

Decision domain disagreementswho has to decide on what (key accountpricing)

Channel members do not agree on objectives

Misunderstanding or mis-interpretation of routine business communication

Three broad categories of channel conflict are: Goal conflictunderstanding of objectives by various channel members

is different (mfrs think Long term but channels think short term gains)

Domain conflictunderstand responsibilities and authority differently

Perception conflictreading of the market place is different and

proposed actions vary

8/10/2019 SDM - Part II - Mod. 4

18/41

Channel Relationships

Goals (what?)

Divergent Convergent

Convergent

Process (How?)

Divergent

Misunderstood Harmonious

Acrimonious Mismanaged

8/10/2019 SDM - Part II - Mod. 4

19/41

Types of Conflicts LatentConflict:

Some amount of discord exists but does not affectthe working or deliveryof customer service objectives.

Disagreement could be on roles, expectations, perceptions,communication.

PerceivedConflict:

Discords become noticeablechannel partners are aware of theopposition.

Channel members take the situation in their stride and go about theirnormal business

No cause for worrybut the opposition has to be recognized FeltConflict:

Reaching the stage of worry, concern and alarm. Also known as affectiveconflict. Parties are trying to outsmarteach other.

Causes could be economical or personalNeeds to be managed effectivelyand not allowed to escalate.

ManifestConflict:Reflects open antagonistic behaviourof channel partners. Confrontationresults.Initiatives taken are openly opposedaffecting the performanceMay require outside intervention to resolve

8/10/2019 SDM - Part II - Mod. 4

20/41

Resolving Conflicts

Understanding nature and intensity

Strategy and plan of action for resolution

Understand the impact of the conflict

Tracing the source of the conflict

4 Stage Process

8/10/2019 SDM - Part II - Mod. 4

21/41

Conflict Resolution Styles

Avoidance

Aggression

Accommodation

Compromise

Collaboration

Least effort and

results

Maximum effort and

Best results

Kenneth W Thomas

Styles are a combination

of assertiveness and

co-operation.

8/10/2019 SDM - Part II - Mod. 4

22/41

Avoidance:

Used by weak channel members.

Problem is postponed or discussion avoided.

Relationships are not of much importance.

As there is no serious effort on getting anything done, conflict is avoided.

Aggression:

Also known as a competitive or selfish style.

It means being concerned about ones own goals without any thought for

the others.The dominating channel partner (may be the principal) dictates terms to the

others. Long term could be detrimentalto the system.

Accommodation:

A situation of complete surrender.

One party helps the other achieve its goals without being worried about its

own goals.

Emphasis is on full co-operation and flexibility in approach. May generate

matching feelings in the receiver.

If not handled properly, can result in exploitation

Compromise:

8/10/2019 SDM - Part II - Mod. 4

23/41

Compromise:

Obviously both sides have to give up somethingto meet mid way.

Can only work with small and not so serious conflicts.

Used often in the earlier two stages.

Colloboration:Also known as a problem solvingapproach

Tries to maximize the benefitto both parties while solving the dispute.

Most ideal styleof conflict resolutiona win-win approach

Requires a lot of time and effortto succeed.

Sensitive information may have to be shared

Channel Policies:Defines how the channel is required to operate.

Normally framed by the channel principalto guide the operationsof the channel

systemIf not framed properly could prove the starting point of channel conflicts.

Some subjects of channel policies could be: Marketsto be covered, Customer

coverage, Pricing, Product portfolioto be handled, Selection, terminationof

channel members, Ownershipof the channel

8/10/2019 SDM - Part II - Mod. 4

24/41

Channel Members Evaluation:

Effectivenessof the distribution channel determines the success of the company

Company would like its channel partners to perform at the highest standardspossible

Need to constantly evaluateperformance on sales targets, coverage, productivity,inventory holdings, attending to servicing requests etc

Evaluation on pre-agreed tasksonly. No surprises.Specific targetson periodical basis are set.

Targets on volume and outlet productivity could be for a week or a month

Targets relating to increasing market shares or total outlet coverage couldbe for 6 monthsDifferent weightages could be given for each of the parameters forevaluation

The performance appraisal is open and transparent

Leading FMCG companies feel that an ROI of 30%for a distributor is healthy and

is a fair indication that he is performing well.

If the ROI is more, additional tasks are given

If the ROI is less, the company may provide additional support

Post evaluation tasks include counseling, retraining and motivating. In extreme

cases it may result in termination

8/10/2019 SDM - Part II - Mod. 4

25/41

Channel Information Systems

CIS is the orderly flow of pertinent operational

data both internally and between channelmembers,for use as a basis of decision making inspecified responsibility areas of channelmanagement

InformationAdvantages:Useful in marketing planninghelps improvequalityof marketing decisions

Can help tap market opportunities

Provides an alert against competitionHelps spot trendsfavourable or otherwiseHelps develop action plansfor growthGives feedbackon consumer needs

8/10/2019 SDM - Part II - Mod. 4

26/41

Sources of Data Reports(oral and written) and recordsof channel members, sales

people Letters, statements and market research Any other infocollected by the sales people and the channel

members from the market External sourceslike business publications, magazines, newspapers,

trade journals.

In a dedicated channel system the collection of info is wellstreamlinedin the JC meeting With use of IT enabled systems collection and processing has

become simpler.

In a good channel MIS, it is necessary to define upfront for eachelement of the MIS, the following:

Purposeof the info Sourceof the info

Action possible

Impact on customer service

8/10/2019 SDM - Part II - Mod. 4

27/41

Elements of a CIS

Market Information

Competition tracking

Distributor profiles &

database Retailer profiles &

database

Primary sales

Secondary sales

Distributor paymentrecords

Distribution costsfreight, storage,ordering, inventorycontrol

Pricing trends

Promotions

Statutory information &

reporting (VAT etc)

8/10/2019 SDM - Part II - Mod. 4

28/41

Distribution of services The Services Sector:

Twice the sizeof the manufacturing sector

Services offered are to be in line with customer demand

Services have to be presented in an appealing mannertosustain customers.

Needs specialized channelswhich understand the

characteristicsof service delivery 5 Characteristics of Services:1. They are intangiblecan only be felt. No visual features like

size, style.2. They are inseparablefrom their service providersa 3P

cannot deliver3. They cannot be standardizedcustom made and delivered4. Customers are involvedto a great degreedefine the

services5. They are perishablecannot be stored for delivery later.

Salvage value of an unsold service is zero.

8/10/2019 SDM - Part II - Mod. 4

29/41

Place: Distribution of Services

There is no actual tangible product which is being distributed.

It involves consumersmovement to the service location. As consumer is part of the

service operation, the method of selling and environment within which service

product purchase is made becomes part of the service experience.

The intermediaries/agents play a key role in recommending services to

consumers.

The service organisation has to devise promotional/distribution strategies

which encourage the customer to come directly, through agents or other modes.

Key Issues Regarding Location

Need of the market

Technological innovation

Convenience

8/10/2019 SDM - Part II - Mod. 4

30/41

Situation Impact

1. Customer goes to service provider. Service providers have to select an appropriatelocation or multi-locations.

2. Service provider goes to customer. Location becomes less important because theservice provider either provides service atcustomers place, e.g., janitorial services, customerlawncare service, lift repair service or decides to doit at his premises, e.g., some mechanics repair thecar at owners premises or they bring the car to thegarage for repairs.

3. Service provider and customer transact at

arms length.

Location becomes insignificant, e.g., in case ofe-mail, no transaction or interaction is requiredwhereas at ATM, customer is using a servicewithout interacting with people but he may chooseto go to a bank for another transaction personally.

Service Location: Situations and their Impact

8/10/2019 SDM - Part II - Mod. 4

31/41

Accessibility

Accessibility to range and choice of service literature and brochures

Accessibility to components such as visas, travellerscheques, insurance and

cards

Accessibility to booking points in every main town and cities

Accessibility to alternative brands

Accessibility to alternative agents.

Major Intermediaries for Service Delivery

Services

Franchisees

Electronic Channels

Agents/Brokers

8/10/2019 SDM - Part II - Mod. 4

32/41

Broad Options for the Form of Channel

Form of Channel Type of Service

Direct Sales Accounting Services

Producer Consumer Management Consulting Services

Design and Technical Services

Dieting Services

Eyecare Services

Hair Fashioning Services

Healthcare Services

Legal Services

Agents or Brokers Insurance Services

Producer Agent Consumer Tour and Travel Services

Hotel Reservation Services

Ticketing Services

Advertising Services

Seller and Buyer Agent or Broker Stocks and Shares Brokers

Commodity Brokers

Real Estate

Holding and Investment

Franchises and Contracted Services Deliveries Fast Food Services

Agent Consumer Car Rental Services

Dry Cleaning Services

8/10/2019 SDM - Part II - Mod. 4

33/41

Some Franchising Examples

Product/Service Category Sample Franchises

FAST FOOD McDonalds

Dominos

WimpysEDUCATION Aptech

NIIT

CMC

STG

Tulec

COURIER Overnite ExpressDHL

Fedex

HOTELS Holiday Inn

Radisson

BEAUTY PARLOURS Shehnaz

Electronic Channels

8/10/2019 SDM - Part II - Mod. 4

34/41

Electronic Channels

Increased use of self service operations, e.g., many marketing firms have put their

services on the Net.

Providing data bank services, e.g., a service provider may require

information to make a mailing list to target a specific audience. Electronic banking.

E-mail and many more.

Advantages

Convenience

Low Cost

Wide Distribution

Customer Choice

Quality Control

Agents and Brokers

Agents : Agents are wholesalers who do not take title of products. They work for

commission or fee as payment for their services and are comprised of

manufacturers/service providers agents, selling agents and commission

merchants.

8/10/2019 SDM - Part II - Mod. 4

35/41

Services Providers Agents : They work for two or more related services from

noncompeting service creators in a specific geographic territory.

Selling Agents : Selling agents sell full range of services of a service provider and are

responsible for all aspects of marketing of those services under a contractual

agreement. Brokers: Brokers do not have any affiliation with any particular service provider. They

specialise in certain areas and bring buyers and sellers together to negotiate the

contract.

Benefits of Using Agents/Brokers

1. The services become widely represented and accessible.

2. The selling and distribution costs are reduced.

3. The marketing strategies can be tailored to suit the local markets as

agents/brokers possess expert knowledge of local conditions.

4. Those involved in providing services possess special knowledge and skill and therefore

assemble the package of services from the suppliers for the service buyers.

5. They can provide services of the customers choice and they represent multiple

providers of services.

8/10/2019 SDM - Part II - Mod. 4

36/41

Channels of Distributions for Airline Services (Typical)

AIRLINES

Consolidation Tour operator

Travel agent

Affiliated withcompanies

Direct via-homeleased system

Passenger

8/10/2019 SDM - Part II - Mod. 4

37/41

Channels of Distribution for Musical Event Show

MUSICAL EVENT SHOW (BUSINESS MANAGER)

MANAGER

BOOKINGAGENCY

SPONSOR

MUSICAL SHOW AUDIENCE

MANAGER

BOOKINGAGENCY

MUSICCOUNCIL

MUSICCOUNCIL

MUSICCOUNCIL

BOOKING

AGENCY

SPONSOR SPONSOR SPONSOR SPONSOR SPONSOR

MUSICMEDIA

8/10/2019 SDM - Part II - Mod. 4

38/41

Channels of Distribution of Services

Customer

Customer

Customer

Customer

Customer

Travel agency

Travel agency

Travel agency

Tour operator

Tour operator

Channels of Distribution-Destination/Tourism Supplier (Typical)

International Distribution

8/10/2019 SDM - Part II - Mod. 4

39/41

International Distribution

Management Distribution important in international markets due to

distance and transportation time. Importers, manufacturers and retailers are increasingly

asking for Just in Timedeliveries.

Distribution strategy varies from market to marketdepending on size and local conditions.

Multiple channels may be used in countries

DISTRIBUTION OPTIONS:

Depends on the volume of the business

Positioningof the product

Infrastructure of distribution in the country

Local lawssome countries insist on local companies inthe distribution business

Internetas a channel of sales and distribution

8/10/2019 SDM - Part II - Mod. 4

40/41

PRICING AND PAYMENT TERMS:

Common pricing terms are:

Ex Worksat the mfrs factory gate

FOT, FORfree on truck / railloaded on truck/railFASfree along sideat port next to ship

FOBfree on boardloaded on ship

C&Fcost and freightinclusive of to destination

CIFcost, insurance and freightinclusive to destination

Payment terms can include:Cash in advanceCash on deliverycash against documentsConsignment basispayable after sale

Usancepayment days after acceptance of documentsLetter of creditLong term credit financingfor machinery / projects

Each method has risks for the buyer or seller. The LC offers safetyand comfort for both

8/10/2019 SDM - Part II - Mod. 4

41/41

CURRENCY OF PRICING:

The US Dollar is the most widely used currency for pricing

international sales

Importers in some countries may prefer invoicing in localcurrencies like Japanese Yen or Euro or Pound Sterling, Singapore

Dollars or UAE Dirhams Saudi riyals etc.

This reduces the risk of exchange rate fluctuations for the buyer

Exchange fluctuationis a major risk for sellers and can be managed

by hedging the currency.

ROLE OF LOGISTICS:

Very important aspect of international selling

Logistics can make up over 15% of the cost of the productInvolves multiple modes of transportland, sea and air

Considerable paperwork and formalities to be completed in

international trade

Logistics providers now offer complete one stop solution including