Marketing Management Mba 2009 Lecture Notes

Chapter 15: DESIGNING AND MANAGING INTEGRATED MARKETING CHANNELS Successful value creation needs successful value delivery. Companies are looking at the suppliers’ suppliers upstream and at the distributors’ customers downstream. MARKETING CHANNELS AND VALUE NETWORKS • Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. • Merchants: intermediaries who buy, take title to, and resell the merchandise. • Agents: search for customers and may negotiate on the producer’s behalf but do not take title to the goods. • Facilitators : assist in the distribution process but neither takes title to goods nor negotiates purchases or sales. The Importance of Channels • A marketing channel system is the particular set of marketing channels employed by a firm. • Channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price. Role of channels: o Converting potential buyers into profitable orders is one of the chief roles of marketing channels. o Marketing channels must not just serve markets, they must also make markets. o The company’s pricing depends on whether it uses mass-merchandisers or high-quality boutiques. o The firm’s sales force and advertising decisions depend on how much training and motivation dealers need. o channel decisions involve relatively long-term commitments to other firms as well as a set of policies and procedures. o push versus pull marketing. Push strategy: manufacturer induces intermediaries to carry, promote, and sell the product to end user. o Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the stores, the product is an impulse item, and product benefits are well understood. Pull strategy: manufacturer using induces consumers to ask intermediaries for the product. o Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between brands, and when people choose the brand before they go to the store.

Hybrid Channels: using multiple channels, internet, distributors etc , improving the ability to order a product online, and pick it up at a convenient retail location, return an online ordered product to a nearby store of the retailer, the right to receive discounts based on total online and off-line purchases. Understanding Customer Needs • Nunes and Cespedes argue that in many markets, buyers fall into one of four categories: 1. Habitual shoppers: Purchase from the same places in the same manner over time. 2. High value deal seekers - Know their needs and "channel surf" a great deal before buying at the lowest possible price. 3. Variety-loving shoppers'-Gather information in many channels, take advantage of high-touch services, and then buy in their favorite channel, regardless of price. 4. High-involvement shoppers- Gather information in all channels, make their purchase in a lowcost channel, but take advantage of customer support from a high-touch channel. Value Networks
Demand chain planning : A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow. Company should first think of the target market, and then design the supply chain backward from that point.
Value network—a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings, the company lies at its center. A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate customers, and their end customers.
Demand chain planning yields several insights: 1. The company can estimate whether more money is made upstream or downstream. 2. The company is more aware of disturbances anywhere in the supply chain that might cause costs, prices, or supplies to change suddenly. 3. Companies can go online with their business partners to carry on faster and more accurate communications, transactions, and payments to reduce costs, speed up information, and increase accuracy.

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Managing this value network has required companies to make increasing investments in information technology (IT) and software. Marketers have traditionally focused on the side of the value network that looks toward the customer. In the future, they will increasingly participate in, influence their companies’ upstream activities, and become network managers.

THE ROLE OF MARKETING CHANNELS 1. Many producers lack the financial resources to carry out direct marketing. 2. Help producers increasing investment in their main business. 3. In some cases, direct marketing simply is not feasible. 4. Making goods widely available and accessible to target markets. 5. Intermediaries contacts, experiences, specialization, and scale of operations, usually offer the firm more than it can achieve on its own. Channel Functions and Flows A manufacturer selling a physical product and services might require three channels: o A sales channel, o A delivery channel and o A service channel. All channel functions have three things in common: 1. They use up scarce resources. 2. They can often be performed better though specialization. 3. They can be shifted among channel members. Channel Levels 1. The producer and the final consumer are part of every channel. 2. A zero-level channel (also called a direct-marketing channel) manufacturer directly to final consumer. 3. A one-level channel contains one selling intermediary—such as a retailer. 4. A two-level channel contains two intermediaries—wholesaler and a retailer. 5. A three-level channel contains—wholesalers, jobbers, and retailers. Direction of flow: 1. Forward movement of products from source to user. 2. Reverse-flow channels (through several intermediaries) are important in the following cases: a. To reuse products or containers b. To refurbish products for resale c. To recycle products d. To dispose of products and packaging Service Sector Channels • Marketing channels are not limited to the distribution of physical goods. • As the Internet and other technologies advance, service industries are operating through new channels. CHANNEL-DESIGN DECISIONS Designing a marketing channel system involves analyzing customer needs, establishing channel objectives, identifying major channel alternatives, and evaluating major channel alternatives. 1. Analyzing Customers’ Desired Service Output Levels Channels produce five service outputs: 1. Lot size: min qty 2. Waiting and delivery time 3. Spatial convenience: geographic coverage 4. Product variety 5. Service backup The marketing-channel designer knows that providing greater service outputs means increased channel costs and higher prices for customers. 2. Establishing Objectives and Constraints 1. Channel institutions should minimize total channel costs and still provide desired levels of service outputs. 2. Planners can identify several market segments. 3. Channel objectives vary with product characteristics. 4. Channel design must take into account the strengths and weaknesses of different types of intermediaries. 3. Identifying and Evaluating Major Channel Alternatives

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Alternatives are: sales forces, to agents, distributors, dealers, direct mail, telemarketing, and the Internet. Each channel has unique strengths as well as weaknesses. Most companies now use a mix of channels. Each channel hopefully reaches a different segment of buyers and delivers the right products to each at the least cost. A channel alternative is described by three elements: o The types of available business intermediaries o The number of intermediaries needed. o The terms and responsibilities of each channel member.

Marketing Insight: How Carmax is transforming the auto business Details the way Carmax sells used cars in changing the business model for the entire auto business. Number of Intermediaries • Exclusive distribution: o Means severely limiting the number of intermediaries. o Maintain producers control over the service level and outputs offered by the resellers. • Selective distribution involves the use of more than a few, but less than all, of the intermediaries who are willing to carry a particular product • Intensive distribution consists of the manufacturer placing goods or services in as many outlets as possible aiming at increase coverage and sales. Terms and Responsibilities of Channel Members The producer must determine the rights and responsibilities of participating channel members. The main elements in the “trade-relations mix” are: 1. Price policy 2. Conditions of sale 3. Distributors’ territorial rights 4. Mutual services and responsibilities 4. Evaluating the Major Alternatives Each channel alternative needs to be evaluated against economic, control, and adaptive criteria. 1. Economic Criteria: Each channel will produce a different level of sales and costs. 2. Control and Adaptive Criteria: Using a sales agency poses a control problem. To develop a channel, members must make some degree of commitment to each other for a specified period of time  lead to a decrease in the producer’s ability to respond and adapt to a changing marketplace. CHANNEL-MANAGEMENT DECISIONS After a company has chosen a channel alternative, individual intermediaries must be selected, trained, motivated, and evaluated. Channel arrangements must be modified over time.

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A. Selecting Channel Members They should evaluate the: 4. Financial strength 1. Number of years in business 2. Other lines carried 5. Cooperativeness 3. Growth and profit records 6. Service reputation If the intermediaries are sales agents, producers should evaluate the: 1. Number and character of other lines carried. 2. Size and quality of the sales force. If the intermediaries are department stores that want exclusive distribution, the producer should evaluate: 1. Locations 2. Future growth potential 3. Type of clientele

B. Training and Motivating Channel Members • The company should provide training programs and to improve intermediaries’ performance. • The company must constantly communicate its view that the intermediaries are partners. • Producers vary greatly in skill in managing distributors. • Channel power can be defined as the ability to alter channel member’s behavior. • Manufacturers can draw on the following types of power to elicit cooperation: 1. Coercive power 4. Expert power 2. Reward power 5. Referent power 3. Legitimate power

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C. Evaluating Channel Members • Producers must periodically evaluate intermediaries’ performance against such standards as sales quota attainment, average inventory levels, customer delivery times, treatment of damaged and lost goods, and cooperation in promotional and training programs. • Under performers need to be counseled, retrained, motivated, or terminated D. Modifying Channel Arrangements • Modification becomes necessary when the distribution channel is not working as planned. 1. When consumer-buying patterns change 2. When the market expands 3. When new competition arises 4. When innovative distribution channels emerge 5. And when the product moves into the later stages in the product life cycle • In competitive markets with low entry barriers, the optimal channel structure will inevitably change over time. • The change could involve: a. adding or dropping individual channel members. b. Adding or dropping particular market channels. c. Developing a totally new way to sell goods. CHANNEL INTEGRATION AND SYSTEM Distribution channels change. New wholesaling and retailing institutions emerge, and new channel systems evolve. Vertical Marketing Systems • One of the most significant recent channel developments is the rise of vertical marketing systems. • A conventional marketing system comprises an independent producer, wholesaler(s), and retailer(s). • A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a unified system. The channel captain, owns the others, franchises them, or has so much power that they all cooperate. • VMSs eliminate the conflict that results when independent members pursue their own objectives. • VMSs achieve economies through: 1. Size 2. Bargaining power 3. The elimination of duplicated services • There are three types of VMS: 1. Corporate 2. Administered 3. Contractual Corporate VMS: combines successive stages of production and distribution under single ownership. Administered VMS: successive stages of production and distribution through the power of one of the members. • Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. • The most advanced supply-distributor arrangement for administered VMS involves distribution programming that can be defined as building a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors. • The manufacturer establishes a department within the company called distributor-relations planning. • Its job is to identify distributor needs and build up merchandising programs to help each distributor operate as efficiently as possible. Contractual VMS: consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. • Contractual VMSs now constitute one of the most significant developments in the economy. • They are of three types: 1. Wholesaler-sponsored voluntary chains 2. Retailer cooperatives 3. Franchise organizations • The traditional system is the manufacturer-sponsored retailer franchise. • Another is the manufacturer-sponsored wholesaler franchise. • A new system is the service-firm-sponsored retailer franchise. The New Competition in Retailing The new competition in retailing is no longer between independent business units but between whole systems of centrally programmed networks (corporate, administered, and contractual) competing against one another to achieve the best cost economies and customer response.

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Horizontal Marketing Systems Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Integrating Multi-Channel Marketing Systems • Most companies have adopted multichannel marketing. • Multi-channel marketing occurs when a single firm uses two or more marketing channels to reach one or more customer segments. Advantages: 1. Increased market coverage. 2. Lower channel cost. 3. More customized selling. Disadvantages: 1. New channels typically introduce conflict and control problems. 2. Two or more channels may end up competing for the same customers. 3. The new channel may be more independent and make cooperation more difficult. Moriarty and Moran propose using the hybrid grid to plan the channel architecture. 1. The grid shows several marketing channels (rows). 2. Several demand-generation tasks (columns) 3. The grid illustrates why using only one channel is not efficient. Marketing Memo: Multichannel shopping checklist Relates how a group called “Best of Breed Multi-channel Shopping Checklist” helps marketers integrate online and offline channels. CONFLICT, COOPERATION, AND COMPETITION • Channel coordination occurs when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals. • Channel conflict is generated when one channel member’s actions prevents the channel from achieving its goal. • Types of Conflict and Competition • Same channel conflict : o Vertical channel conflict means conflict between different levels within the same channel. o Horizontal channel conflict involves conflict between members at the same level within the channel. • Multi-channel conflict exists when there are two or more channels that sell to the same market. members of one channel get a lower price (based on larger volume purchases) or work with a lower margin. Causes of 1. 2. 3. 4.

Channel Conflict One major cause is goal incompatibility. Some conflict arises from unclear roles and rights. Conflicts can also stem from differences in perception. Conflict might additionally arise because of the intermediary’s dependence on the manufacturer.

Managing Channel Conflict • The challenge is not to eliminate conflict but to manage it better. There are several mechanisms for effective conflict management. One is the adoption of superordinate goals • Channel members come to an agreement on the fundamental goal they are jointly seeking. • Much can be accomplished by encouraging joint membership in and between trade associations. • When conflict is chronic or acute, the parties may have to resort to: a. Diplomacy b. Mediation c. Arbitration d. Lawsuits Legal and Ethical Issues in Channel Relations • Exclusive dealing often includes exclusive territorial agreements. a. The producer may agree not to sell to other dealers in a given area. b. The buyer may agree to sell only in its own territory. • This second practice has become a major legal issue. • Producers of a strong brand sometimes sell it to dealers only if they will take some or all of the rest of the line. This practice is called full-line forcing. • Producers can drop dealers for “cause” but they cannot drop dealers if, the dealer refuses to cooperate in doubtful legal arrangements. E-COMMERCE MARKETING PRACTICES • E-business describes the use of electronic means and platforms to conduct a company’s business. • E-commerce means that the company offers to transact or facilitate the selling of products and services online.

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E-purchasing means companies decide to purchase goods, services, and information from online suppliers. E-marketing describes company efforts to communicate, promote, and sell its products and services online. We can distinguish between pure-click companies and brick-and-click companies.

Pure-Click Companies • There are several kinds of pure-click companies: 1. Search engines 4. Transaction sites 2. Internet Service Providers (ISPs) 5. Content sites 3. Commerce sites 6. Enabler sites • Companies must set up and operate their e-commerce Web sites carefully. Customer service is critical. • Consumer surveys suggest that most significant inhibitors of online shopping are the absence of: 1. Pleasurable experiences. 2. Social interaction. 3. And personal consultation. Brick-and-Click Companies • Adding an e-commerce channel creates the treat of a backlash from retailers, brokers, agents, or other intermediaries. • There are at least three strategies for trying to gain acceptance from intermediaries: 1. Offer different brands or products on the Internet. 2. Offer the off-line partners higher commissions to cushion the negative impact on sales. 3. Take orders on the Web site but have retailers deliver and collect payment. • Some pure or predominately online companies have invested in brick-and-mortar sites. • Ultimately, companies may need to decide whether to drop some or all of their retailers and go direct. M-Commerce Many see a big future in M-commerce (m for mobile). Consumers and businesspeople no longer need to be near a computer to send and receive information.

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