Chapter 7: Place andDevelopment ofChannel Systems

Main Points What functions performed by marketing specialists to What functions performed by marketing specialists to

overcome discrepancies b/w P and C.overcome discrepancies b/w P and C. Understand why some firms use direct or indirect Understand why some firms use direct or indirect

channel systems.channel systems. Understand how to develop co-operative Understand how to develop co-operative

relationships and avoid conflicts in channel systemsrelationships and avoid conflicts in channel systems Know traditional and vertical marketing systemsKnow traditional and vertical marketing systems Know intensive, selective and exclusive distribution.Know intensive, selective and exclusive distribution. New terms.New terms.

Definitions

Place(p318)Place(p318): making goods and services : making goods and services available in the right quantities and available in the right quantities and locations, when customers want them.locations, when customers want them.

Channel of distribution(p319)Channel of distribution(p319): any : any series of firms or individuals who series of firms or individuals who participate in the flow of products from participate in the flow of products from producer to final user or consumer.producer to final user or consumer.

Distributors simplifies trading

M

M

M

C

C

C

M

M

M

C

C

C

D

1

2

3

4

5

6

7

8

9

1

2

3

4

5

6

(a) number of contacts (b) number of contacts M×C=3×3=9 M+C=3+3=6 M=Manufacturer C=Customer D= Distributor

Marketing functions

Effective marketing(p321)Effective marketing(p321): getting products to : getting products to the consumers at the right time, in the right the consumers at the right time, in the right place, and at a price they’re willing to pay; place, and at a price they’re willing to pay; keeping consumers satisfied after the sale, and keeping consumers satisfied after the sale, and bringing them back to purchase again when they bringing them back to purchase again when they are ready.are ready.

Marketing functions(p322) Buying functionBuying function: looking for and evaluating goods and : looking for and evaluating goods and

services.services. Selling functionSelling function: promoting the product.: promoting the product. Transporting functionTransporting function: the movement of goods from one : the movement of goods from one

place to another.place to another. Standardization and gradingStandardization and grading: sorting products according to : sorting products according to

size and quality.size and quality. FinancingFinancing: providing the necessary cash and credit to : providing the necessary cash and credit to

produce, transport, store, promote, sell, and buy products.produce, transport, store, promote, sell, and buy products. Risk takingRisk taking: bearing the uncertainties that are part of the : bearing the uncertainties that are part of the

marketing process.marketing process. Market information functionMarket information function: the collection, analysis, and : the collection, analysis, and

distribution of all the information needed to plan, carry out, distribution of all the information needed to plan, carry out, and control marketing activities.and control marketing activities.

Who perform marketing functions? (p323)

Planned economy – government agencies, Planned economy – government agencies, producers, consumers;producers, consumers;

Market-directed economy – producers, consumers, Market-directed economy – producers, consumers, marketing specialists.marketing specialists.

Intermediaries (p321)Intermediaries (p321): someone who specializes : someone who specializes in trade rather than production.in trade rather than production.

Facilitators (p323)Facilitators (p323): firms that provide one or more : firms that provide one or more of the marketing functions other than buying or of the marketing functions other than buying or selling (eg. advertising agencies, marketing selling (eg. advertising agencies, marketing research firms, independent product-testing research firms, independent product-testing laboratories, public warehouses, transporting firms, laboratories, public warehouses, transporting firms, communications companies, and financial communications companies, and financial institutions).institutions).

Many Individual Consumers

To create utility and direct flow ofneed-satisfying goods and services

To overcome discrepancies andseparations

Perform universal marketing functions

Middlemenintermediaries

Many Individual Producers

Facilitators

Model of Market-DirectedMacro-Marketing System

Monitoring by government(s)and public interest groups

EXHIBIT 11-4

Marketing Facilitates Production and Consumption (P322)

Production SectorSpecialization and division of labour = heterogeneous supply capabilities

Consumption SectorHeterogeneous demand for form, task, time, place, and possession utility

Discrepancies of Quantity

Discrepancies of Assortment

Spatial Separation

Separation in Time

Separation of Information

Separation in Values

Separation of Ownership

Marketingneeded

to overcomediscrepancies

andseparations

There are discrepancies and separations between producers and consumers.

Discrepancy of quantity (p324)Discrepancy of quantity (p324): the difference : the difference between the quantity of products it is economical for between the quantity of products it is economical for a producer to make and the quantity final users or a producer to make and the quantity final users or consumers normally want.consumers normally want.

Discrepancy of assortment (p325)Discrepancy of assortment (p325): the difference : the difference between the lines a typical producer makes and the between the lines a typical producer makes and the assortment final consumers or users want.assortment final consumers or users want.

Spatial separation

Producers tend to locate where it is economical to Producers tend to locate where it is economical to produce, while consumers are located in many produce, while consumers are located in many scattered locations.scattered locations.

Separation in time

Consumers may not want to consume goods and Consumers may not want to consume goods and services at the time producers would prefer to produce services at the time producers would prefer to produce them, and time may be required to transport goods from them, and time may be required to transport goods from producer to consumer.producer to consumer.

Separation of information

Producers do not know who needs what, where, Producers do not know who needs what, where, when, and at what price. when, and at what price.

Consumers do not know what is available from Consumers do not know what is available from whom, where, when, and at what price.whom, where, when, and at what price.

Separation in values

Producers value goods and services in terms of Producers value goods and services in terms of costs and competitive prices. costs and competitive prices.

Consumers value them in terms of economic utility Consumers value them in terms of economic utility and ability to pay.and ability to pay.

Separation of ownership

Producers hold the title to goods and services that Producers hold the title to goods and services that they themselves do not want to consume. they themselves do not want to consume.

Consumers want goods and services that they do Consumers want goods and services that they do not own.not own.

AccumulatingAccumulatingBulk-

BreakingBulk-

Breaking

AssortingAssortingSortingSorting

Regrouping ActivitiesAdjustingQuantity

discrepancies

Adjustingassortment

discrepancies

Specialists adjust discrepancies Regrouping activities (p325) Regrouping activities (p325) : adjusting the quantities : adjusting the quantities

and/or assortment of products handled at each level in a and/or assortment of products handled at each level in a channel of distribution.channel of distribution.

Accumulating (p325) Accumulating (p325) : collecting products from many : collecting products from many small producers.small producers.

Bulk-breaking (p325) Bulk-breaking (p325) : dividing larger quantities into : dividing larger quantities into smaller quantities as products get closer to the final smaller quantities as products get closer to the final market.market.

Sorting (p325) Sorting (p325) : separating products into grades and : separating products into grades and qualities desired by different target market.qualities desired by different target market.

Assorting (p325) Assorting (p325) : putting together a variety of products : putting together a variety of products to give a target market what it wants. to give a target market what it wants.

Strategic Decision Areas in Place (p319)

Type ofchannel

Type of physical distribution

facilities needed

How to managechannels

Intermediaries/facilitators needed

Degree of marketexposure desired

IndirectDirect

Place objectives

Customerservice

level desired

Place objectives To consider place objective in relation to product classes To consider place objective in relation to product classes

(p261, p265).(p261, p265). Staples – maximum exposure with widespread, low-cost Staples – maximum exposure with widespread, low-cost

distribution;distribution;

Impulse – widespread distribution with display at point of Impulse – widespread distribution with display at point of purchase;purchase;

Emergency – widespread distribution near probable point of Emergency – widespread distribution near probable point of need;need;

Homogeneous shopping – enough exposure to facilitate price Homogeneous shopping – enough exposure to facilitate price comparison;comparison;

Heterogeneous shopping – distribution near similar products;Heterogeneous shopping – distribution near similar products;

Specialty products – limited distribution Specialty products – limited distribution

Unsought products – available in places where similar products Unsought products – available in places where similar products are sought.are sought.

Place objectives To consider place objective in relation to product life To consider place objective in relation to product life

cycle.(p299, exhibit 10-3)cycle.(p299, exhibit 10-3)

Introduction – specialist channels ( hobbyist Introduction – specialist channels ( hobbyist shops, boutiques )shops, boutiques )

Growth – higher-volume channels ( department Growth – higher-volume channels ( department stores )stores )

Maturity – lower-cost channels (mass Maturity – lower-cost channels (mass merchandisers )merchandisers )

Decline – even lower-cost channels (mail order Decline – even lower-cost channels (mail order houses )houses )

Direct or indirect channels (p329)

Direct channelsDirect channels: producers distribute : producers distribute directly to final customers.directly to final customers.

Indirect channelsIndirect channels: producers use : producers use wholesaler, retailers, and other specialists wholesaler, retailers, and other specialists to distribute indirectly to final customers. to distribute indirectly to final customers.

Number of Channel levels

M

M

C

C

retailer

retailer

retailer

jobber

wholesaler

wholesaler

Industrial

distributors

representatives

Sales branch

0-level

(M-C)

1-level (M-R-C)

2-level(M-W-R-C)

3-level(M-W-R-J-C)

Why a Firm May Want to Use Direct Channels (p330)

Greater ControlGreater Control

Lower CostLower Cost

More effective work than intermediaries

More effective work than intermediaries

Direct Contact withCustomer Needs

Direct Contact withCustomer Needs

Quicker Response orChange in Marketing Mix

Quicker Response orChange in Marketing Mix

Suitable Intermediaries Not Available

Suitable Intermediaries Not Available

SomeReasonsfor ChoosingDirect Channels

SomeReasonsfor ChoosingDirect Channels

Reasons for using indirect channels (p331)

Customers have established buying patterns through Customers have established buying patterns through specialists.specialists.

Consumers are spread throughout many areas and Consumers are spread throughout many areas and prefer to shop at specific places.prefer to shop at specific places.

To avoid a significant investment in direct distribution.To avoid a significant investment in direct distribution.

Some intermediaries provide credits to customers.Some intermediaries provide credits to customers.

Intermediaries can often help producers serve Intermediaries can often help producers serve customer needs better and at lower cost.customer needs better and at lower cost.

Managing Channel Relationships

Role of Channel Captain

Common Objectives

Conflict Handling

Choosing the Type of Relationship

Whole-Channel Product-Market Commitment

KeyIssues inChannel

Management

Product-market commitment sharing

All members focusing on the same target All members focusing on the same target market at the end of the channel and share market at the end of the channel and share the various marketing functions in appropriate the various marketing functions in appropriate ways.ways.

Channel relationship types Traditional channel systems(p336)Traditional channel systems(p336): :

systems in which the various channel systems in which the various channel members make little or no effort to co-operate members make little or no effort to co-operate with each other.with each other.

Vertical marketing systems (p336)Vertical marketing systems (p336): channel : channel systems in which the whole channel focuses systems in which the whole channel focuses on the same target market at the end of the on the same target market at the end of the channel. channel. Corporate channel systemsCorporate channel systems Contractual channel systemsContractual channel systems Administered channel systemsAdministered channel systems

Traditional vs vertical

Corporate channel systems

Corporate ownership all along the Corporate ownership all along the channel (p336)channel (p336)

Contractual channel systems

Various channel members agree by Various channel members agree by contract to co-operate with one contract to co-operate with one another. (p337)another. (p337)

Administered channel systems

Various channel members informally Various channel members informally agree to co-operate with one another. agree to co-operate with one another. (p337)(p337)

Vertical Marketing Systems compete well (p336 Exhibit11-5)

Characteristics

Type of channel

Little ornone

Some to good

Fairly goodto good Complete

NoneEconomic power and leadership

ContractsOne

company ownership

Typicalchannel of

“inde-pendents”

McDonald’s Florsheimshoes

General Electric

Amount of cooperation

TraditionalVertical marketing systems

Administered Contractual Corporate

Control maintained by

Examples

Conflicts handling

Reason – different objectivesReason – different objectives

Vertical conflicts – occur between firms at Vertical conflicts – occur between firms at different levels of the channel. ( a conflict different levels of the channel. ( a conflict between the producer and the retailer about between the producer and the retailer about shelf space)shelf space)

Horizontal conflicts – occur between firms at Horizontal conflicts – occur between firms at the same level in the channel. (Different the same level in the channel. (Different stores offer different prices.)stores offer different prices.)

Channel captain

A manager who helps direct the A manager who helps direct the activities of a whole channel and tries to activities of a whole channel and tries to avoid, or solve channel conflicts.avoid, or solve channel conflicts.

Some producers lead their channels.Some producers lead their channels.

Some intermediaries are channel Some intermediaries are channel captains.( Wal-Mart)captains.( Wal-Mart)

= number ofoutlets

Intensive

Selective

Exclusive

What MarketExposureFits the

MarketingObjectives

Market Exposure

Ideal market exposureIdeal market exposure: when a product is available : when a product is available widely enough to satisfy target customers’ needs but not widely enough to satisfy target customers’ needs but not exceed them.exceed them.

Excessive coverageExcessive coverage increases the total cost of increases the total cost of marketing and can remove the incentive for individual marketing and can remove the incentive for individual retailers to aggressively promote a brand.retailers to aggressively promote a brand.

Intensive distributionIntensive distribution: selling through all responsible and : selling through all responsible and suitable wholesalers and retailers who will stock and /or suitable wholesalers and retailers who will stock and /or sell the product.sell the product.

Selective distributionSelective distribution: selling through only those : selling through only those intermediaries who will give the product special attention.intermediaries who will give the product special attention.

Exclusive distributionExclusive distribution: selling through only one : selling through only one intermediary in a particular geographic area.intermediary in a particular geographic area.