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UNIT 11 MANAGING CHANNEL STRUCTURE,

DESIGN AND FUNCTIONS

Managing Channel Structure,Design and Functions

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Self-InstructionalMaterial 143

UNIT 11 MANAGING CHANNELSTRUCTURE, DESIGN ANDFUNCTIONS

Structure

11.0 Introduction11.1 Unit Objectives11.2 What is a Marketing Channel?

11.2.1 Demand-side Factors11.2.2 Supply-side Factors

11.3 Role and Functions of Marketing Channels11.3.1 Manufacturers11.3.2 Intermediaries11.3.3 End-Users11.3.4 Manufacturer-based Channel Formats11.3.5 Marketing Channel Design

11.4 Channel Design Segmentation11.5 Channel Design Positioning11.6 Channel Design Targeting11.7 Channel Design: Establishing New Channels or Refining Existing Channels

11.7.1 Implementation of Channel Design11.7.2 Goals of the Channel Members May Differ11.7.3 The Alternatives11.7.4 The Distribution Framework

Case Example: A Multimedia Company11.8 Channel Conflicts11.9 Channel Coordination

11.10 Service Outputs11.10.1 New Initiatives in Channel Output

11.11 Segmenting the Market by Service Output Demands11.12 Summary11.13 Key Terms11.14 Answers to ‘Check Your Progress’

11.15 Questions and Exercises

11.0 INTRODUCTION

A marketing channel is a set of interdependent organizations involved in the process ofmaking a product or service available to the end-user. A channel usually comprises themanufacturer, the wholesaler, the retailer and others.

Channel development is spurred by two factors: the demand side and the supplyside factors.

A manufacturer needs to know how, and to whom, he can sell its products and anend-user must know where s/he can find the products s/he wishes to purchase. Amanufacturer reaches its products to the end-user through wholesale, retail or specializedintermediaries—that is the distribution channel.


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The challenge, therefore, is to design the most appropriate channel and thenimplement it. Another equally important aspect is the proper positioning of a channel.

All these issues are discussed and explained in this unit with suitable, live examples.

11.1 UNIT OBJECTIVES

After going through this unit, you will be able to:

Explain what marketing channels are

Understand why manufacturers choose to use intermediaries between themselvesand end-users

Describe what marketing flows define the work of the channel

Know who the members of marketing channels are

Understand the importance of considering a framework for marketing channeldesign and analysis

Emphasize that the end goal of channel management is satisfaction of target end-user segment’s demands for service outputs

11.2 WHAT IS A MARKETING CHANNEL?

A marketing channel is a set of interdependent organizations involved in the process ofmaking a product or service available for use or consumption.

This definition makes it clear that running a marketing channel is a ‘process’, notan event. Distribution frequently takes time to accomplish, and even when a sale isfinally made, the relationship with the end-user is usually not over. The purpose of channelmarketing is to satisfy the end-users in the market, be they consumers or final businessbuyers. Their goal is the use or consumption of the product or service being sold. Amanufacturer who sells through distributors to retailers, who serve final consumers, maybe tempted to think that it has generated ‘sales’ and developed ‘happy’ customers whenits sales force successfully places a product in the distributors’ warehouses. The marketingchannel is often viewed as a key strategic asset of a manufacturer.

Marketing channels are behind every product and service that consumers andbusiness buyers purchase everywhere. Yet, in many cases, these end-users are unawareof the richness and complexity necessary to deliver what might seem like everydayitems to them. Usually, combinations of institutions specializing in manufacturing,wholesaling, retailing, and many other areas join forces in marketing channels.

We focus on two sources of impetus for channel development, i.e. the demandside and supply-side factors.

11.2.1 Demand-side Factors

Marketing channels containing intermediaries arise partly because they facilitatesearching. The process of search is characterized by uncertainty on the part of bothend-users and sellers. End-users are uncertain about where to find the products orservices they want, whereas sellers are uncertain about how to reach target end-users.If intermediaries did not exist, a seller without a known brand name would be unable togenerate much sales.


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Instead, intermediaries facilitate searches at both ends of the channel. For example,a manufacturer of many different qualities of paper can sell plain laser-jet paper througha ‘category killer’ discount retailer. For example, Universal Book Depot in Lucknow,India, sells fine stationary through department stores, especially stationary stores. Anend-user looking for laser-jet printer paper does not have to worry about searchingacross all possible paper manufacturers and can be reasonably certain of finding thedesired product at a retailer such as Universal. These retailers create images forthemselves that educate consumers about their positioning and product lines, and thusfacilitate the search process on the demand side. It is no longer necessary for eachconsumer to search the market for manufacturers of these or other goods; the name ofthe retailer represents availability of the products.

Independent intermediaries in a marketing channel perform the valuable functionof sorting goods. This is significant because of the natural discrepancy between theassortment of goods and services made by a given manufacturer and the assortmentdemanded by the end-user.

The sorting function performed by intermediaries includes the following activities:

Sorting: This involves breaking down a heterogeneous supply into separate stocks thatare relatively homogeneous.

Accumulation: The intermediary brings similar stocks from a number of sources togetherinto a larger homogeneous supply. (Wholesalers accumulate varied goods for retailers,and retailers accumulate goods for consumers.)

Allocation: This refers to breaking a homogenous supply down into smaller and smallerlots. Allocating at the wholesale level is referred to as breaking bulk.

Assorting: This is the building up of an assortment of products for resale in associationwith one another. (Wholesalers build an assortment of goods for retailers, and retailersbuild assortments for consumers.)

In short, intermediaries help end-user consume a combination of product andchannel services that are attractive to them. Intermediaries can thus be viewed as creatingutility for the end-user.

11.2.2 Supply-side Factors

Each transaction involves ordering, value creating, and paying for goods and services.The buyer and seller must agree on the amount, mode and timing of payment. Thesecosts of distribution can be minimized if the transactions are routine; otherwise, everytransaction is subject to bargaining, with an accompanying loss of efficiency.

Moreover, routinization leads to standardization of goods and services, for whichperformance characteristics can be easily compared and assessed. It encouragesproduction of items that are highly valued. In short, routinization leads to efficiencies inthe execution of channel activities, as the following examples demonstrate.

World wide, Bosch is the largest German auto component company. It announceda strategic long-term partnership with Mico in India, known as Mico Bosch, a leadingauto component manufacturer, to collaborate on a joint distribution strategy. The partners’‘Joint Supply Chain Team’ included employees of both firms who met on a regular basisto improve distribution. The aim was to gain membership of marketing channels, anddrawing up a framework to analyse how to improve the channel decision made by anexecutive acting as a channel manager or designer.


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11.3 ROLE AND FUNCTIONS OF MARKETINGCHANNELS

The work of a marketing channel includes the performance of several marketing flows.We use the term ‘flows’ rather than ‘functions’ or ‘activities’ to emphasize that theseprocesses often flow through the channel, being done at different points in time bydifferent channel members. In institutional settings, one often hears of the need to carryinventory; to generate demand through selling activities, to physically distribute products;to engage in after-sales service; and to extend credit to other channel members or end-users.

An important flow that permeates all the value-added activities of the channel isthe flow of information. Information can and does flow between every possible pair ofchannel members, in both routine and specialized ways. Retailers share information withtheir manufacturing supplies about sales trends and patterns through electronic datainterchange relationship; when used properly, this information can help to better managethe costs of performing many of the eight classic flows.

A manufacturer must either assume responsibility for all channel flows or shiftsome or all of them to the various intermediaries populating its channel. This implies animportant truth about channel design and management: one can eliminate or substitutemembers in the channel, but the flow performed by these members cannot be eliminated.When channel members are eliminated from the channel, their flows are shifted forwardor backward in the channel and therefore assumed by other channel members. Theobvious reason for eliminating a channel member is that the flows performed by thatchannel member can be done as effectively and as cheaply by other channel members.

The key members of a marketing channel are manufacturers, intermediaries(wholesale, retail, and specialized), and end-users (business customers or consumers).

11.3.1 Manufacturers

By ‘manufacturers’ we mean the producer or originator of the product or service beingsold. The following examples are illustrative.

Some manufacturers brand their products and so are known by name to end-users, even if they use intermediaries to reach them. Examples include Unilever, theEuropean consumer packaged-goods company; major world automakers such asMercedes-Benz, Ford, or Toyota; or pharmaceutical manufacturers such as Merck,Pfizer, or Roche.

Other manufacturers make products but do not invest in a branded name forthem. Instead, they do private-label production, and the downstream buyer puts its ownbrand name on the product. For example, the German firm FJM Collections designs fineladies’ handbags, shoes, and other leather goods made from Chinese eel-skin. FJMcontracts out production of handbags to manufacturers in Asia and production of shoesto an Italian manufacturer.

The examples show that the manufacturer’s ability to manage a productionoperation does not always extend to a superior ability to perform other channel flows.This reinforces the insight that intermediaries add that value to the channel through theirsuperior performance of certain channel flows, and that manufacturers voluntarily seeksuch intermediaries to increase their reach in the end-user market.


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11.3.2 Intermediaries

The term ‘intermediary’ refers to any channel member other than the manufacturer orthe end-user. We can differentiate among three types of intermediaries: wholesale, retail,and specialized.

Wholesalers include merchant wholesalers or distributors, manufacturers’representative, agents, and brokers. A wholesaler sells to other channel intermediaries,such as retailers, or to business end-users, but not to individual consumer end-users.Merchant wholesalers take on the role of both wholesalers and retailers. They takephysical possession of inventory; store inventory;promote the products in their line; andarrange for financing, ordering, and payment with their customers. They make theirprofit by buying at a wholesale price and selling at a marked-upprice to their downstreamcustomers.

Retail intermediaries come in many forms today, including department stores,mass merchandisers, hypermarkets, specialty stores, category killers, convenience stores,franchises, buying clubs, warehouse clubs, catalogers, and online retailers.

Whereas historically, retailers’ role has focused on amassing an assortment ofgoods that is appealing to their consumer end-users, their role today often goes muchfurther.

11.3.3 End-users

It is important to note that end-users (either business customers or individual consumers)are themselves channel members as well. We classify consumers as marketing channelmembers because they can and frequently do perform channel flows, just as otherchannel members do.

11.3.4 Manufacturer-based Channel Formats

Manufacturers Direct: Products are shipped and serviced from the manufacturer’swarehouse. They are sold by company sales force or agents. Many manufacturers-direct companies also sell through wholesaler-distributors

Licence: This implies contracting distribution and marketing functions through licencingagreements, usually granting exclusivity for some period of time.

Consignment-Locker Stock. In this format, the manufacturer ships products tothe points of consumption; but the title does not pass until the product is consumed. Therisk of obsolescence and ownership is the manufacturer’s until used. This arrangementis usually associated with high-period-high-margin items and emergency items, such asdiamonds and fragrances.

Booker: A specialized sales force contracted by manufacturers, the sales force carriesother comparable product lines and focuses on a narrow customer segment.

Franchise: Here, product and merchandizing concepts are packaged and formatted.Territory rights are sold to franchisees. Various distributions and other services areprovided by contract to franchisees for a fee.

Departmental store: This type of store offers a wide variety of merchandise with amoderate depth of selection. The typical product mix includes both soft goods (e.g.,clothing, food, linen) and hard goods.

Check Your Progress

1. What is a marketingchannel?

2. Define the term‘intermediary’.


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Mass merchandizer: This is similar to a departmental store, except that product selectionis broader and prices are usually lower.

Specialty store: Offers merchandise of one line (e.g., women’s apparel, electronic)with great depth of selection at prices comparable to those of departmental stores.

Convenience store: A small, higher-margin grocery store that offers a limited selectionof staple groceries, non foods, and other convenience items (e.g., ready-to-heat andready-to-eat foods).

Hypermarket: A very large food and general merchandise store with at least 100,000square feet of space. These stores typically devote as much as 75 per cent of the sellingarea to general merchandise.

11.3.5 Marketing Channel Design

The marketing channel challenge involves two major tasks: to design the right channeland to implement that design. The design step involves segmenting the market, identifyingoptimal positioning responses to segments’ demands, targeting the segments on which tofocus the channel’s efforts, and establishing or refining the channels to manage themarketplace. The implementation step requires an understanding of each channelmember’s sources of power and dependence, of the potential for channel conflict, and aresulting plan for creating an environment where the optimal channel design can beeffectively executed on an ongoing basis, which we call channel coordination.

Figure 11.1 depicts the important elements in the channel design and implementationprocess: segmentation, positioning, targeting, and responsive channel establishment orrefinement, which together comprise the channel design process.

11.4 CHANNEL DESIGN SEGMENTATION

One of the fundamental principles of marketing is the segmentation of the market.Segmentation means the splitting of a market into groups of consumers who are: (i)maximally similar within each group and (ii) maximally different between groups. Forthe channel manager, segments are best defined on the basis of demands for the outputsof the marketing channel.

End-users are the final consumers having varying demands for these serviceoutputs. Consider, for example, two different soft drink buyers: an office employee atwork, looking for a soft drink during her afternoon coffee break, and a family buying forat-home consumption. There are differences in service output demands between thetwo segments of buyers. The office employee has high demands for all service outputsexcept assortment and variety (for which her demand is moderate, implying willingnessto brand-switch within reason), whereas the family has the opposite pattern of serviceoutput demands. Clearly, a different marketing channel meets the needs of these twosegments of shoppers. The office employee cannot travel to a grocery store to buy acan of soda during her break, nor does she want to buy a six-pack or more of cans ofsoft drinks. She is willing to pay a slightly higher price for the convenience of getting justa single can of soda close to her office. A vending machine would be an ideal retail outletfor her. The family, on the other hand, would not find the vending machine an attractiveretail purchase alternative. The family’s demand for assortment and variety may not bemet by a vending machine. A local supermarket does a better job of meeting the family’sservice output demands for soft drinks. This example shows how the same product can


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be demanded with a widely varying set of service outputs, resulting in very differentdemands for the product-plus-service-output bundle by different segments of end-users.

11.5 CHANNEL DESIGN POSITIONING

Just as positioning a product means setting its product attributes, price, and promotionalmix to best fit the demands of a particular segment, so also positioning refers to thedesign of the distribution channel to meet the segment’s demands. This exercise shouldbe done, even if the channel ends up not selling to some of the segments in the end. Thechannel analyst may then discover that some segments simply do not make good targetsbecause their demands cannot be adequately met with the channel’s current resources.Alternatively, the positioning exercise may reveal some unexpectedly attractive segmentsto target. Unless the optimal channel is defined for each segment, it is impossible tomake a thorough decision about what segments to target.

The optimal channel is defined first and foremost by the necessary channel flowsthat must be performed in order to generate the specific segment’s service outputdemands. Channel flows are all the activities of the channel that add value to the end-user. In enumerating the list of channel flows, we go beyond the concept of mere handlingof the product to include issues of promotion, negotiation, finance, ordering, and payment.

The design of the channel structure involves two main elements. One, the channeldesigner must decide who are to be the members of the channel. For example, will aconsumer packaged-goods manufacturer sell its grocery products through small,independent retailers with in-city locations, or through large chain stores that operatediscount warehouse stores? Or will it use an outlet such as Indiangrocer.com, an onlineseller of Indian food and household products that operates no retail store at all?

Two, a decision needs to be made as to how many of each type of channelmember will be in the channel. In particular, should the channel for a consumer goodinclude many retail outlets (intensive distribution), just a few (selective distribution), oronly one (exclusive distribution) in a given market area? The answer to this questiondepends both on efficiency and implementation factors.

The channel structure decisions of type, identity, and intensity of channel membersshould all be made with the minimisation of channel flow costs in mind. That is, eachchannel member is allocated a set of channel flows to perform, and ideally the allocationof activities results in the reliable performance of all channel flows at minimum totalcost.

The exercise results in one channel profile for each segment that is identified inthe market segmentation stage of the exercise. Each of these channel profiles is calleda zero-based channel, because it is designed from a zero base of operations, that is, asif there were no pre-existing channel in the market. The concept of a zero-based channelmeans that the segment’s service output demands are met and that they are met atminimum total channel cost.

11.6 CHANNEL DESIGN TARGETING

The channel manager is equipped to decide what segments to target. Knowing whatsegments to ignore in one’s channel design and management efforts is very important,because it keeps the channel focused on the key segments from which it plans to reapprofitable sales.


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The channel manager has to look at the internal and external environment facingthe channel. For example, the top management of a manufacturing firm may be unwillingto allocate funds to build a series of regional warehouses that would be necessary toprovide spatial convenience in a particular market situation. Many countries restrict theopening of large mass-merchandise stores in urban areas, to protect small shopkeeperswhose sales would be threatened by larger retailers. Such legal restrictions can lead toa channel design that does not appropriately meet the target segment’s service outputdemands, and may cause a channel manager to avoid targeting that segment entirely.

When superior competitive offerings do not exist to serve a particular segment’sdemands for service outputs, the channel manager may recognize an unexplored marketopportunity and create a new channel to serve that under-served segment. Meetingpreviously unmet service output demands can be a powerful competitive strategy forbuilding loyal and profitable consumer bases in a marketplace.

11.7 CHANNEL DESIGN: ESTABLISHING NEWCHANNELS OR REFINING EXISTINGCHANNELS

The channel manager has identified the optimal way to reach each targeted segment inthe market, as well as the bounds that might prevent the channel from implementing thezero-based channel design in the market. If no channel exists currently in the market forthe segment, the channel manager should now establish the channel design that comesclosest to meeting the target market’s demands for service outputs, subject to theenvironmental and managerial bounds constraining the design.

If there is a pre-existing channel in place in the market, however, the channelmanager has to perform a gap analysis. The differences between the zero-based andactual channels on the demand and supply sides constitute gaps in the channel design.

On the demand side, gaps mean that at least one of the service output demands isnot being appropriately met by the channel. The service output in question may be eitherunder supplied or over supplied. The target segment is likely to be dissatisfied becauseend-users would prefer more service than they are getting.

11.7.1 Implementation of Channel Design

Assuming that a good channel design is in place in the market, the channel membersmust now implement the optimal channel design.

Incomplete incentives among channel members would not be a problem if theywere not dependent upon each other. However, by the very nature of the distributionchannel structure and design, specific channel members are likely to specialize in particularactivities and flows in the channel. If all channel members do not perform appropriately,the entire channel effort suffers. For example, even if everything else is in place, apoorly performing transportation system that results in late deliveries of the product toretail stores prevents the channel from succeeding in selling the product. The same typeof statement could be made about the performance of any channel member doing any ofthe flows in the channel. Thus, it is apparent that inducing all of the channel members toimplement the channel design appropriately is critical for the success of any channeldesign.

Check Your Progress

3. What doessegmentation mean?

4. What can thechannel manager doif superiorcompetitiveofferings do notexist?


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It is not possible for a company to have a common channel for all its products andmarkets. The company has to ensure that the product reaches the right segment at theright time and the right place, and also reflects the product’s positioning. Quite often,companies have to have different channels to reach the different segments.

Channel for Arrow: There was only one link between the company and thefinal customer, the franchisee. The company supplied goods to these franchiseesfrom their central warehouse at Bangalore (see Figure 11.2). These franchiseeswere large upmarket retail outlets.

Company plant (Bangalore)

Central warehouse (Bangalore)

Franchisee(in Class A and B towns)

Figure 11.2 Channel for Lee, Arrow, and Flying Machine

Subsequent to the entry of the multinational labels, this structure had to bechanged.

Channel for hosiery products: The hosiery range of products is producedat the fabrics division of Arvind Mills, which is located in Bangalore. Thefinished goods were shipped to the central warehouse, located at Bangaloreitself.

The next link in the distribution chain was the clearing and forwardingagent. There were C&F agents located all over the country. Usually, therewas one C&F agent for a state. However, for larger states such as UttarPradesh, there were two C&F agents. The last link in the chain is the dealer(see Figure 11.3).



C&F agents

Dealers

Figure 11.3 Channel for Hosiery Products

Channel for Ruf & Tuf: Arvind Mills, the first company in the country tohave pioneered the innovative concept of a ready-to-stitch jeans pack, tookthe lead in launching this pack where readymade jeans were not easily available.


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Distributors

Sub-distributors

Wholesalers

Retailers

Figure 11.4 Channel for Ruf & Tuf

These were sold through a multi-layered distribution channel (see Figure 11.4).The goods move from the central warehouse to the distributors. The distributors supplythe goods to the sub-distributors, who supply to the wholesalers, from whom it ultimatelyreaches the end-retailer.

11.7.2 Goals of the Channel Members May Differ

Broadly, channel members’ objectives could be: (a) sales; (b) profitability of individualitems; (c) return on investment; or (d) early recovery of cash. The goals for differentchannel members could be different. The differences could be at different levels of thechannel structure or at the same level of the channel structure.

To a large extent, it can be said that the objectives of the C&F agent, the distributors/stockists, wholesalers, and retailers would be different. Generally, a C&F agent wouldhave an objective of overall profit from each company he is dealing with. At the nextlevel, the distributors/stockists would have an objective of return on investment. This isbecause many companies consider the distributors/stockists to be an extended arm ofthe company and the companies would require the distributors/stockists to carry outseveral activities on their behalf (for example, promotion, prospecting). In return, thedistributors/stockists look for at least the minimum returns on investment to stay inbusiness. Wholesalers, to a large extent, would be interested in rotation of money andhence would have an objective of ‘early return of cash’. Generally, the wholesaler getsthe goods on credit. These goods are immediately sold on cash with a very small marginor even at the cost price. This would help the wholesaler get cash to purchase othergoods. In this process, the wholesaler would be in a position to rotate his money severaltimes before the initial bill comes for payment. There are also instances where thewholesaler may be willing to sell the goods at a price lower than the cost price and coverit up with the money he gets for selling the packaging material (cartons, jute bags, etc.)in which the goods were supplied. Companies like Procter & Gamble (P&G) admit thatthe wholesalers are responsible for price cutting. The retailers’ objective, on the otherhand, would be to increase sales.

The issue of differing objectives would be even more important if the members atthe same level had differing objectives. This would occur if the company has differenttypes of channel members at a level. For example, if a company were selling its productsthrough franchise outlets as well as multi-brand outlets, then the two outlets would have


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different objectives. The franchise would have an objective of return on investment(RoI), whereas the multi-brand outlets would have an objective of maximizing sales.This is a common situation in the shoe business.

Hence, while designing the channels the company has to ensure that it will be ina position to fulfill the objectives of the different channel members without creating aconflicting situation.

11.7.3 The Alternatives

A company has several alternatives at each level in the channel. A company could optfor a franchise, a company-owned outlet, or a multi-brand outlet to sell its products. Atthe next level, the company could have a C&F agent, a wholesaler, or a distributor. So,at each level a company has several options,each of which could be suitable for aspecific situation. A case in point is the air-conditioning industry.

The distribution network used for air-conditioning usually has three levels in thechannel. At the regional level, the company has a godown (stocking point) handling acertain zone. This is employed by the company to store the goods of the company foronward distribution. These goods are then shipped to a channel member responsible forsupplying goods to the dealers. Five to ten such redistributors are appointed for a state.These redistributors are spread across the area to be easily accessible to the dealers,generally in various principal cities. These distributors service the dealers who fall intheir territory. The structure can be summarized thus:

Level 1: Stocking points

Level 2: Redistributors

Level 3: Dealers

However, various options are possible at each level. There are the different kindsof dealers, like wholesale dealers, sales and service dealers, and sales-only dealers. Thedealers vary according to the function they perform. Sales and service dealers providecomprehensive service to the customer, including after-sales service as well as handlingof certain other complaints. The sales-only dealers’ role is restricted to providing aselling point to the company. In this case, the company agents, not the dealers, handlethe majority of the post-purchase transactions with the customer. The wholesale dealersare those who not only retail but also sell the product to sub-dealers. A wholesale dealeris appointed if the company is interested in reaching a larger territory.

The Distribution Network of Carrier Aircon: Carrier Aircon has a networkwith its branch offices and their godowns as the first level of distribution. It hasbranches across the country which handle the storage and distribution of theproducts to the distributors/direct dealers and handling of any customer complaintsregarding product defects, guarantee, etc.

The next level comprises Broadly, channel members’ objectives could be:(a) sales; (b) profitability of individual items; (c) return on investment; or (d) earlyrecovery of cash.what are called direct dealers. These are the dealers whomthe representatives of the company visit regularly and supply with the products.In areas where the market is dispersed, there these dealers further distribute theproduct to indirect dealers or sub-dealers, who are sales-only dealers and do nothave any direct contact with the company.


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Branch office/godown

Direct dealers

Only salesSub-dealers

Figure 11.5 The Distribution Network of Carrier Aircon

The Distribution Network of Whirlpool: Whirpool has a system of wholly-owned wholesale buyers who have branches countrywide for distribution andafter-sales service. The company supplies to these wholesale buyers, and they inturn supply to the dealer network of Whirpool. These dealers are again authorizeddealers and sub-dealers.

Wholesale buyer

Godown of wholesale buyer

Authorized dealer

Figure 11.6 The Distribution Network of Whirlpool

The Distribution Network of LG: LG operates mainly through C&F agentswho handle its warehousing and distribution to the dealer network. LG also has anetwork of exclusive showrooms which sell the entire range of home appliancesmanufactured by LG.

C&F agent

LGGallery

Salesdealers

Figure 11.7 The Distribution Network of LG

11.7.4 The Distribution Framework

The framework takes a bottom-up approach by starting with the consumer and lookingat his needs.

Buyers’ Needs

According to the Vice President, Marketing and Exports, of Britannia Industries, thechallenge is to build a vast network cost effectively, with a wider distribution pipeline. Inorder to increase their reach, companies are expanding their network by adding newchannels. Packaged food products are now available in various types of retail outlets,ranging from groceries, general stores, and food stores to paan/bidi outlets. Again, interms of fast-moving consumer goods (FMCGs), the traditional boundaries are fastdisappearing. Chemists are stocking packaged products ranging from shampoo to salt.DCS Home Product (DCW) is now selling Captain Cook salt and atta (wheat flour)through chemists. Johnson & Johnson (J&J) is selling Kids, its soap for children, throughvarious places like toy shops, in addition to its traditional outlets. Mother Dairy is expandingits distribution cover to include grocery outlets and pushcarts.


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Retailers’ Requirements

The next issue in the channel design is to reach and service these outlets. Severalintermediaries could cater to these outlets. Normally, the manufactured goods are storedin warehouses that are scattered across the country. From the warehouses, goods aretransported to dedicated intermediaries. The intermediaries service the retail trade atregular intervals, depending on the type of products. The intermediaries would, however,have to be determined by taking into account the retailers’ considerations. The retailers’considerations would depend upon: (a) the nature of the product and (b) servicingrequirements of the retailer.

If the product is bulky and the retailer cannot have a large stock of it, then theretailer may prefer to stock a small quantity of the product and re-book as and when thesale takes place. In such situations, the next level that supplies material to these outletshas to be close by and should be in a position to replenish the stocks fast (for example,refrigerators). Similarly, FMCGs have to be replenished fast and, therefore, the stockingpoint has to be close by. On the other hand, if the product is perishable, the number ofintermediaries needs to be minimized so that the product reaches the last point of salefast and with minimum handling (for example, bread).

Legal Requirements

The tax implications could also influence the channel structure. For example, the companymay wish to appoint carrying and forwarding agents instead of distributors if they wishto transfer the material across the state boundary on a consignment basis.

CASE EXAMPLE: A MULTIMEDIA COMPANY

The case pertains to a multimedia company that wanted to enter the domestic personalcomputer (PC) market. Previously, the company used to sell only to industrial buyersthrough direct salesmen, and the company’s personnel, to industrial buyers through directsalesmen, and the company’s personnel, located at different cities, provided after-salesservice. The company had about 80 service centres and their territory was uniquelydefined. The management felt that the existing sales force and channel design would notbe sufficient for the home PC market. A different type of channel design and servicingfacility to serve the highly scattered market was to be planned. The channel design wasdeveloped using the above framework.

Target Segment

In India, a PC does not enjoy the same priority in the household basket as in the Westerncountries. In general, people in India think of a PC only after they have purchased arefrigerator, TV, music system, air-conditioner, and car. Although of late the PC is movingup in the priority list, it has a long way to go before it becomes a necessity. Thecomputerization of all public systems and performance of the computer company hasgone a long way in changing the perception of the Indian household towards a PC.

Though the decision of the target market is part of the overall marketing strategy,it was suggested that the company concentrate on India’s upper and upper middle classes,as a PC, whose cost would be in the region of Rs.30,000, can only be afforded by thissegment.

Check Your Progress

5. What does thechannel manager doif there is a pre-existing channel inplace in the market?

6. What are the broadobjectives of channelmembers?


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Buyers’ Needs

A buyer has a wide range of choice in PCs, with even a wider array of add-ons. Theconsumers undertake elaborate pre-purchase planning to obtain the right product thatsatisfies their needs. The pre-purchase process, which is carried out for collection ofinformation, extends to the point of sale also. The company has to identify outlets thatwould help the buyer in this pre-purchase process. The pre-purchase requirements include:

Demonstrability: A customer would like his product to be demonstrated within ashop, so as to help him understand its working, etc.

Information: For a high-involvement product like a PC, the customer would liketo have a lot of information to help him to make the best choice.

Hands-on experience: A PC is a high-tech item. Demonstration by the salesmanmay not satisfy the customer fully. He would like to have hands-on experience tofamiliarize himself with the product and develop confidence that he can handlethe PC alone without any help.

Options based on Buyers’ Needs

The options satisfying the buyers’ needs are franchises and company-owned showrooms.Multi-company outlets are not considered as they could dilute the effect of the pullgenerated. The present behaviour of consumers is such that they consider the companyimage to be more important and relevant during decision making. That is to say, theconsumers are ‘pulled’ to the outlet more by the company name rather than the brandname. To capitalize on this behaviour and to avoid sales losses due to dealers’ ‘push’, amulti-company outlet was not considered. In a multi-company outlet, the dealer maypush a competitors’ brand.

Retailers’ Needs

Handling: A PC is a fragile and sophisticated instrument, which requires carefulhandling, as alsothe correct atmosphere for storing. It needs to be handled underexpert supervision, therefore the retail outlets may not wish to take on the burdenof stocking.

Low volume: As PCs are a low-volume item, stocking may unnecessarily blockcapital and storage space. Thus, the retailer outlets may not want to stock theproduct. Moreover, the consumer would not like to carry it off the shelf, andwould rather have it delivered to his place. He would not mind a delay of a day orso.

The retail outlet can therefore have a minimum number of models for demonstrationpurpose and the higher-level intermediary could take up stocking of the product. Deliveryto the customer can be made after procuring the model from the stocking point, as thecustomer is willing to wait.

Location of the Next Level

Since consumers do not mind a delay of a day or so for delivery of the product, thelocation of the next level need not be very close to the point of sale. The stocking pointcan be at a centralized place catering to several markets. It was, therefore, suggested tohave the second level at the state level. This could be a distributor or a carrying andforwarding agent.


NOTES


Legal Requirement

To take into account some of the tax burdens, it had been suggested to have a carryingand forward agent as the state-level intermediary.

Distribution Requirement

Function to be performed by the channel:(i) Technical competency: For a high-tech item like the PC, channel members

have to be technically equipped to satisfy all the queries and doubts of thecustomer (who may not be aware of the technicalities of the PC).

(ii) Increase awareness of the product: The PC (which is very low on thepriority list of customer) requires the effort of the channel to increase theawareness of the product and develop interest in the product.These functions can be done both by the franchise as well as the company-owned outlet.

Reach: As the company plans to market in the four southern states of India, itwould require a carrying and forwarding agent in each state.

Since both the alternatives (franchises and company showrooms) satisfy thebuyers’ as well asthe distributors’ needs, they need to be evaluated on cost, control,middleman profitability, and adaptability.

Cost: The company showroom will be a costly choice because of the overheadsof maintaining the staff and the showroom.

Control: While maximum control can be exercised in a company-ownedshowroom, the required control can be exercised over a franchisee also as thefranchisee’s business is solely dependent on the image of the company.

Adaptability: In case the company wants to modify the channel design in thefuture, the franchisee would be more adaptable as compared to a companyshowroom.

Middlemen variables: Profitability to the middlemen is projected to be moderatein the initial years and high subsequently, as the demand for PCs would increaseover time.

Table 11.1 Summary of Evaluation

Channel strategy Cost Middlemen Control Adaptabilityprofitability

Caompany Showroom High NA High LowFranchise Medium Moderate Hight High

Considering the factors listed in Table 11.1, in the long run a franchisee would bemost effective to market the company’s product. The channel satisfying the variousneeds should be as depicted in Figure 11.8.

Company Company Company

Figure 11.8 Suggested Channel Design for a Computer Company


NOTES


This framework could help identify multiple channels, as the process starts withthe buyers’ needs. Buyers of different segments could have different needs, hence thechannel catering to these needs may require different channel alternatives,e.g. the channelnetwork of Moderna, as shown in Figure 11.9.

Company

Distributor Exclusive dealer Company showroom

Consumer

Figure 11.9 Channel Design of Moderna

Moderna has three channels, each catering to a different segment or performinga different role. While the distributor/retailer channel caters to the middle and uppermiddle class, the exclusive outlets cater to the upper-income group. The retail outlets areusually multi-brand outlets giving an opportunity for the middle-income consumer tocompare different alternatives. The exclusive outlets usually stock the very high-priceditems. The company showrooms stock the entire product range of the company andmainly cater to the quality-conscious consumers. These also serve as a consumer-promotion tool.

11.8 CHANNEL CONFLICTS

Channel conflict is generated when one channel member’s actions prevent the otherchannel from achieving its goals. Channel conflict is both common and dangerous to thesuccess of distribution efforts. Given the interdependence of all channel members, anyone member’s actions have an influence on the total success of the channel effort, andthus can harm the total channel performance.

Channel conflict can stem from differences between channel members’ goalsand objectives (goal conflict), from disagreements over the domain of action andresponsibility in the channel (domain conflict), and from differences in perceptions ofthe marketplace (perceptual conflict). These conflicts directly cause a channel memberto fail to perform the flows that the optimal channel design specifies for them, and thusinhibit total channel performance.

In general, channel conflict reduction is accomplished through the application ofone or more sources of channel power. For example, a manufacturer may identify aconflict in its independent-distributor channel: The distributorship is exerting too littlesales effort on behalf of the manufacturer’s product line, therefore sales of the productare suffering. Analysis might reveal that the effort level is low because the distributorshipmakes more profit from selling a competitor’s product than from selling this manufacturer’sproduct. There is thus a goal conflict. The manufacturer’s goal is the maximization ofprofit over its own product line, but the distributorship’s goal is the maximization of profitover all of the products that it sells – only some of which come from this particular


NOTES


manufacturer. To resolve the goal conflict, the manufacturer might use one of the followingstrategies: (i) It might use some of its power to reward the distributor by increasing thedistributor’s discount, thus increasing the profit margin it can make on the manufacturer’sproduct line, or (ii), the manufacturer may invest in developing brand equity and thus pullthe product through the channel. This increases the brand power and induces thedistributor to sell the product more aggressively because the sales potential for the producthas risen.

11.9 CHANNEL COORDINATION

When the members of the channel are brought together to advance the goals of thechannel, rather than their own independent (and likely conflicting) goals, the channel issaid to be coordinated. This term is used to denote both the coordination of interestsand actions among the channel members who produce the outputs of the marketingchannel, and the coordination of performance of channel flows with the production ofthe service output demanded by target end-users. This is the end-goal of the entirechannel management process. As conditions change in the marketplace, the channel’sdesign and implementation may need to respond; thus, channel coordination is not a one-time achievement, but an ongoing process of analysis and response to the market, thecompetition, and the abilities of the members of the channel.

11.10 SERVICE OUTPUTS

A framework for finding out how the end-user wants to buy a particular product wasproposed by Louis P. Bucklin as a basis for determining the channel structure. We usehis original theory here as a foundation to our approach for segmenting the market formarketing channel design purposes. Bucklin argues that channel systems exist and remainviable through time by performing duties that reduce consumers’ search, waiting time,storage, and other costs. These benefits are called the service outputs of the channel.Other things being equal (in particular price), end-users would prefer to deal with amarketing channel that provides a higher level of service outputs. Various generic serviceoutputs are: (i) bulk-breaking, (ii) spatial convenience, (iii) waiting or delivery time, and(iv) product variety.

Bulk-breaking refers to the end-user’s ability to buy its desired (possibly small)number of units of a product or service, even though they may be originally produced inlarge, batch-production lot sizes. When the marketing channel system allows end-usersto buy in small lot sizes, purchases can more easily move directly into consumption,reducing the need for the end-user to carry unnecessary inventory. This in turn can leadto a higher price for the end-user.

Spatial convenience provided by market decentralization of wholesale or retailoutlets increases consumers’ satisfaction by reducing transportation requirements andsearch costs. Commony, shopping centwrs and neighbourhood supermarkets, conveniencestores, vending machines etc., are a few examples of channel forms designed to satisfyconsumers’ demand for spatial convenience.

Waiting time or delivery time, the third service output identified by Bucklin, isdefined as the time period that the end-user must wait between ordering and receivinggoods. Immediate delivery for most products is highly valued by customers (no matter


NOTES


whether they buy online). The longer the waiting time, the greater the inconvenience tothe end-user.

11.10.1 New Initiatives in Channel Output

Changes in both business buyer conditions and individual consumer demographics andpsychographics in various countries and markets provide an opportunity for changes inmarketing channels to serve them.

Outsourcing. Outsourcing refers to the trend toward giving particular corporate activitiesor functions to outside providers. These usually specialize in these areas and thereforeoffer up-to-date technological know-how as well as lower costs due to economies ofscale.

Downsizing. Another corporate trend that has strong implications for service outputdemands of the business buyer is downsizing, the process of decreasing the number ofemployees in the company required to do a given set of functions.

Alphabet Soup. The term ‘alphabet soup’ is used to describe some new initiatives takenin channel management. Efficient Consumer Response or EDR refers to thereorganization of the distribution channel to bring groceries more quickly, and at lowercost, from the point of manufacture to the retail store shelf. Efficient Food-serviceResponse or EFR, on the part of the food industry selling to non-grocery outlets (e.g.corporate dining rooms, hospitals, and schools), and Just In Time or JIT refer to a set ofchannel activities designed to deliver products to the end-user just when they are needed,thus minimiing inventory holding costs in the channel.

11.11 SEGMENTING THE MARKET BY SERVICEOUTPUT DEMANDS

Research can also be designed and conducted from the start to define channel segmentsthat best describe end-users’ service output demands and purchasing patterns. Thechannel segmentation process should be carefully designed to produce groups of buyerswho: (i) are maximally similar within a group, (ii) are maximally different between groups,and (iii) differ on dimensions that matter for building a distribution system.

One of the basic precepts in marketing is that the seller should seek to identifyand then meet the needs of its end-users in the marketplace.

After segmenting the market and identifying each channel segment’s distinct serviceoutput demands, the channel manager can now integrate these insights into the overallmarketing channel design and management plan. Targeting a channel segment meanschoosing to focus on that segment, with the goal of achieving significant sales and profitsfrom selling to that segment. The information on the targeted segments can then be usedto customize the channels: either to design new marketing channels to meet their needsor to modify existing marketing channels to better respond to their demands for serviceoutputs. Service output demand analysis can identify a new market opportunity thatleads to the development of novel ways to sell to a particular segment.

The service output demand analysis performed by the channel manager is usedfor both positioning and targeting channel design.

Check Your Progress

7. When is channelconflict generated?

8. When is a channelsaid to becoordinated?

9. What can thechannel manager doafter segmenting themarket andidentifying eachchannel segment’sservice outputdemands?


NOTES


11.12 SUMMARY

Marketing channel system design and management, like the management of any othermarketing activity, requires to be commenced with the consumer. The channel managermust first understand the nature of consumer demands in order to design a well-workingchannel that meets or exceeds those demands. The most useful demand-side insightsfor marketing channel design are not about what consumers want to consume, but abouthow they want to buy and use the products or services being purchased. In all markets,consumers have differential preferences and demands of service outputs. Groupingend-users in the market by demands for service outputs helps to define potential targetmarket segments for which to design specific marketing channel solutions.

A particular product or service can be bought in different ways. It is not theproduct that changes, but the method of buying and selling the product and its associatedservices. The essential difference to the shopper between a standard grocery storepurchasing experience and the online shopping experience lies in the convenience andspeed of being able to shop from home and getting delivery directly at home, withoutgiving up any product availability or pricing benefits of shopping in the store. Differentend-users have different demands, and understanding and responding to those demandscan create new business opportunities for manufacturers.

11.13 KEY TERMS

Intermediary: It is the channel member, excluding the consumer and manufacturer.

Marketing channel: It is a set of interdependent organizations making the productreach the final consumer.

Value creation: It is providing the customer with something more than the coreproduct.

Channel design: It is the targetting segmenting, and positioning of channelmembers.

Gap analysis: It is the difference between zero-based and actual channel design.

Domain conflict: It refers to differences between responsibilities among channelmembers.

Channel conflict: It refers to differences between channel members’ goals andobjectives.

Goal conflict: It refers to differences between the goals of the channel members.

Outsourcing: It is getting a part of the work done by an outside agency.

Downsizing: It is giving one employee more tasks to do in an organizational set-up.

Channel coordination: It is implementation of channel design with coordinationamong design elements.


NOTES


11.14 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. A marketing channel is a set of interdependent organizations involved in the processof making a product or service available for use or consumption.

2. The term ‘intermediary’ refers to any channel member other than the manufactureror the end-user.

3. Segmentation means the splitting of a market into groups of consumers who are:(i) maximally similar within each group and (ii) maximally different between groups.For the channel manager, segments are best defined on the basis of demands forthe outputs of the marketing channel.

4. When superior competitive offerings do not exist to serve a particular segment’sdemands for service outputs, the channel manager may recognize an unexploredmarket opportunity and create a new channel to serve that under-served segment.

5. If there is a pre-existing channel in place in the market, however, the channelmanager has to perform a gap analysis. The differences between the zero-basedand actual channels on the demand and supply sides constitute gaps in the channeldesign.

6. Broadly, channel members’ objectives could be: (a) sales; (b) profitability ofindividual items; (c) return on investment; or (d) early recovery of cash.

7. Channel conflict is generated when one channel member’s actions prevent theother channel from achieving its goals.

8. When the members of the channel are brought together to advance the goals ofthe channel, rather than their own independent (and likely conflicting) goals, thechannel is said to be coordinated.

9. After segmenting the market and identifying each channel segment’s distinctservice output demands, the channel manager can now integrate these insightsinto the overall marketing channel design and management plan.

11.15 QUESTIONS AND EXERCISES

Short-Answer Questions

1. Define a marketing channel and state its function and role.

2. Why do manufacturers choose to use intermediaries between themselves andend- users?

3. What marketing flows define the work of the channel?

4. State the importance of the members of marketing channels and their role in anorganization.


NOTES


Long-Answer Questions

1. Discuss the demand and supply side factors of channel development.

2. Explain the concept of channel management with the help of a suitable diagram.

3. Describe how a channel design is implemented.

4. What are the alternatives available to a company with regard to the managementof distribution of goods? Discuss

5. Elaborate on the importance of considering a framework for marketing channeldesign and analysis.

Author: Vimi Jham

Copyright © Author, 2011

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