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Copyright 2001 by McGraw-Hill Ryerson Limited

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Chapter Goals

To gain an understanding of:y The nature and importance of intermediariesyWhat a distribution channel is and doesy The decisions involved in designing a channel of

distributiony Major channels used to distribute consumer goods,

business goods, and servicesyVertical marketing systemsy

Intensity of distributiony Choice of intermediaries and conflict managementy Legal considerations and channel arrangements

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The Distribution Function

y distribution is about getting the product or serviceto the customer as conveniently as possible; it

deals with access and availabilityyy intermediariesintermediaries perform many of the distribution

functions on behalf of suppliers

yy merchant intermediariesmerchant intermediaries actually take title tophysical products that they distribute

yy agentsagents do not ever own the products, but theyarrange the transfer of title

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Distribution Channels

yThe role of distribution entails:y Arranging for its sale and transfer of title

y Promoting the product

y

Storing the producty Assuming some risk during distribution.

y Intermediaries often perform theseactivities for producer or consumer.

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Provides market

information

Interprets consumers

wants

Promotes producers

products

Creates assortments

Stores products

Negotiates with

customers Provides financing

Owns products

Shares risks

Anticipates wants

Subdivides large

quantities of a product

Stores products

Transports products

Creates assortments

Provides financing

Makes products

readily available

Guarantees products

Shares risks

SALES SPECIALIST

FOR PRODUCERS

PURCHASING AGENT

FOR BUYERS

IN

T

E

R

ME

D

I

A

RY

The Distribution Functions

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Designing the Channel

Channel design is a strategic marketing tool.Four decisions can be help a firm design adistribution channel:

ywhat role distribution is to play in achievingobjectives

ywhat type of channelis needed? with orwithout intermediaries?

y

what level ofintensity of distribution?ywhich specific intermediaries to use? whichwill be best suited to achieve objectives?

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Specify

the role of

distributionwithin the

marketing

mix

Select

type of

distribu-tion

channel

Determine

appropriate

intensityof distri-

bution

Choose

specificchannel

members

The Well-DesignedDistribution Strategy

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Selecting the Type of Channel

y some firms will distribute directly; otherswill use a number of intermediaries:y producerconsumer (direct)(direct)y

producerretailerconsumery producerwholesalerretailer consumery produceragentretailerconsumery produceragentwholesaleretailerconsu

merywhen would each of these be considered?

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Major Distribution

Channels

y For distribution of consumer goods, fivedifferent types of channels are widely used.

y Business goods are normally distributedthrough four major types of channels.

y There are only two common channels ofdistribution for services.

y Some producers are not content to use only asingle distribution channel and use multiplemultiple

channelschannels (a.k.a dual distributiondual distribution)y Multiple channels can aggravate middlemen

and cause conflicts in the channels.

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ULTIMATE CONSUMERS

PRODUCERS OF CONSUMER GOODS

Retailers Retailers Retailers Retailers

Merchant

wholesalers

Merchant

wholesalers

Agents Agents

Consumer Channels

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BUSINESS USERS

PRODUCERS OF BUSINESS GOODS

Merchant wholesalers

(industrial distributors)

Agents Agents

Merchant wholesalers

(industrial distributors)

Business Channels

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ULTIMATE CONSUMERS OR BUSINESS USERS

PRODUCERS OF SERVICES

Agents

Service Channels

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Multiple Distribution Channels

y some firms will use several distributionchannels to reach specific markets orsegments

y dual distribution is used, for example, toreach business and consumer markets, or tocarry different groups of products

y or may be used to reach different segments ofthe sellers market; different sizes of buyers or

different regions of the countryy some companies operate their own stores

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VerticalMarketing

Systems (VMS)

y a tightly coordinated distribution channeldesigned to improve operating efficiency andmarketing effectiveness.

yy Corporate VMS:Corporate VMS: One firm owns other firms inchannel or the entire channel-- Goodyear, Roots.

yy Contractual VMS:Contractual VMS: Independents work together formuch greater effectiveness: IGA, IDA.

yyAdministered VMS:Administered VMS: Relies on economic power of

one channel member-- Rolex, Kraft General Foods..

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INTENSIVE SELECTIVE EXCLUSIVE

Distributionthrough every

reasonable

outlet in a

market

Distributionthrough multiple,

but not all,

reasonable

outlets in a

market

Distributionthrough a single

wholesaling

middleman

and/or retailer

in a market

Intensity of Distribution

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Considerations in

Channel Choice

yMarket Considerations: Type of market,concentration, potential customers, ordersize.

y Product Considerations: Consider unitvalue, perishability, technical nature of

product.

y Intermediaries Considerations: Services

offered, availability, attitude, dominance.y Company Considerations: Desire for

channel control, management, money andservices seller can provide to support sales.

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Conflict and Control

in Channels

yy Channel conflictChannel conflict exists when channel membersinterfere with each others objectives.

yy Horizontal conflictHorizontal conflict involves firms on same level--grocery store vs. drug store.

yyVertical conflictVertical conflict involves firms at different levels

y producer versus wholesaler

y producer versus retailer

yy Channel PowerChannel Power is the ability to inf luence ordetermine behaviour of others in channel.

y Based on expertise, rewards and sanctions.

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More Complaints

Small suppliers complaints about discounters:y Being asked to supply their goods on consignment.

y Being asked to deal directly with the retailersheadquarters and to give to the retailer an amount

equal to the commission that would have gone tomanufacturers agents.

esponses from smaller suppliers:y Quit doing business with big retailers whose

demands are too strict and outlandish.y Become a retailer.

y Merge with another manufacturer.

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Legal Considerations

yy Dealer SelectionDealer Selection:: Refusing to sell to somefirms. Can be done carefully.

yy Exclusive DealingExclusive Dealing involves shutting outcompetitors, giving most business to onefirm.

yy Tying ContractsTying Contracts involves providing one itemon condition other lines be carried as well.

yy

Exclusive TerritoriesExclusive Territories can create monopolies.

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Channels for Entering

ForeignMarketsyy Exporting,Exporting, through:

yAn export merchantexport merchant in the manufacturer's countrythat buys goods and exports them.

yAn export agentexport agent located in either the manufacturer's

or the destination country.yAcompanys sales branches.companys sales branches.

yy Contracting,Contracting,via:yy Licensing:Licensing: Right to use production process, patents,

trademarks, or other assets.yy Franchising.Franchising.yy Contract manufacturingContract manufacturing:: having a foreign-based

manufacturer produce the product

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More ForeignMarket Entry Channel

Options

yy Direct investment,Direct investment, including:

yyJoint ventureJoint venture or partnership with aforeign company.

yy Strategic allianceStrategic alliance.

yyWhollyWholly--owned subsidiaries.owned subsidiaries.

yy Multinational corporationMultinational corporation,, in which the

foreign and domestic operations areintegrated and are not separatelyidentified.

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The Changing Face

of Distribution

y Internet (click and mortar vs. brick andmortar) a major factor-- where is itheading?

yDirect Response TV sales are growing inpopularity, especially for time-starvedshoppers

y

The worlds largest bookstore is on theInternet! (Amazon.com)

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