Mma6e chapter-15 final

Marketing Management:An Asian Perspective, 6th Edition

Instructor Supplements Created by Geoffrey da Silva

3

Designing and Managing Marketing Channels and Value Networks

15© Pearson Education South Asia Pte Ltd 2013. All rights reserved

Learning Issues for Chapter Fifteen

1. What is a marketing channel system and a value network?

2. What work marketing channels perform?

3. How should channels be designed?

4. What decisions companies face in managing their channels?

5. How companies should integrate channels and manage channel conflict?

6. What are the key issues with e-commerce and m-commerce?

4 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

Chapter Outline

• Successful value creation needs successful value delivery.

• Holistic marketers are increasingly taking a value network view of their businesses.

• Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final consumers.


Chapter Outline

• Companies are looking at the suppliers’ suppliers upstream and at the distributors’ customers downstream.

• They are looking at customer segments and considering a wide range of different possible means to sell, distribute, and service their offerings.

• Companies today must build and manage a continuously evolving and increasingly complex channel system and value network.


Marketing Channels and Value Networks

• Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions.

• These intermediaries constitute a marketing channel (also called a trade channel or distribution channel).

• Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption.


Marketing Channels and Value Networks

• Some intermediaries buy, take title to, and resell the merchandise; they are called merchants.

• Others search for customers and may negotiate on the producer’s behalf but do not take title to the goods; they are called agents.

• Still others assist in the distribution process but neither takes title to goods nor negotiates purchases or sales; they are called facilitators.


The Importance of Channels

• A marketing channel system is the particular set of marketing channels employed by a firm.

• Decisions about the marketing channel system are among the most critical facing management.

• In the United States, channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price.



• Marketing channels also represent a substantial opportunity cost.

• Converting potential buyers into profitable orders is one of the chief roles of marketing channels.

• Marketing channels must not simply serve markets, they must also make markets.



• The channels chosen affect all other marketing decisions:

1. The company’s pricing depends on whether it uses mass-merchandisers or high-quality boutiques.

2. The firm’s sales force and advertising decisions depend on how much training and motivation dealers need.

3. In addition, channel decisions involve relatively long-term commitments to other firms as well as a set of policies and procedures.


Push and Pull Marketing Strategies

In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing.


Push Strategy

• A push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end user.

• 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

• A pull strategy involves the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it.

• 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 and Multichannel Marketing

• Today’s successful companies are also multiplying the number of “go-to-market” or hybrid channels in any one market area.

• Hybrid channels or multichannel marketing occurs when a single firm uses two or more marketing channels to reach customer segments.

• In multichannel marketing, each channel targets a different segment of buyers, or different need states for one buyer, and delivers the right products in the right places in the right way at the least cost. When this does not happen, there can be channel conflict, excessive cost, or insufficient demand.


Hybrid Channels and Multichannel Marketing

• Companies that manage hybrid channels must make sure these channels work well together and match each target customer’s preferred ways of doing business.

• Customers expect channel integration, characterized by the following features:i. order a product online and pick it up at a convenient retail

location ii. to return an online ordered product to a nearby store of the

retailer.iii. receive discounts based on total online and off-line purchases.


Value Network

• A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow.

• The company should first think of the target market, and then design the supply chain backward from that point.

• This view has been called demand chain planning.


Value Network

• An even broader view sees a company at the center of a value network—a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings.

• A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate customers, and their end customers. A company needs to orchestrate these parties to enable it to deliver superior value to the target market.


Creating a Value Network in Order to Deliver Superior Value to a Target Market

Apple’s Developer Connection—where people create iPhone apps and the like—has 50,000 members at different levels of membership. Developers keep 70 percent of any revenue their products generate, and Apple gets 30 percent.


Demand Chain Planning

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.


The Role of Marketing Channels

• Why would a producer delegate some of the selling jobs to intermediaries, relinquishing control over how and to whom the products are sold?


The Role of Marketing Channels

• Through their contacts, experience, specialization, and scale of operation, intermediaries make goods widely available and accessible to target markets, usually offering the firm more effectiveness and efficiency than it can achieve on its own.

• Many producers lack the financial resources to carry out direct marketing.


Channel Functions and Flows

• A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place, and possession gaps that separate goods and services from those who need and want them.

• Members of the marketing channel perform a number of key functions. See Table 15.1.

• Some functions constitute a forward flow of activity from the company to the customer.

• Other functions constitute a backward flow from customers to the company.

• Still others occur in both directions.


Table 15.1: Channel Member Functions


Online Stores Providing Time Utility

An online 7-Eleven with butler service was introduced in China. Consumers can order soft drinks and instant noodles and have them delivered to their homes within an hour.


Channel Flows

• Five flows are illustrated in Figure 15.1 for the marketing of forklift trucks.

• If these flows were superimposed in one diagram, the tremendous complexity of even simple marketing channels would be apparent.


Figure 15.1: Marketing Flows in the Marketing Channel for Forklift Trucks


Types of Channels

A manufacturer selling a physical product and services might require three channels:

1. A sales channel

2. A delivery channel

3. A service channel


Responsibility for Channel Functions

• The question is not whether various channel functions need to be performed—they must be—but rather, who is to perform them.

• All channel functions have three things in common:

i. they use up scarce resources;

ii. they can often be performed better through specialization; and

iii. they can be shifted among channel members.


Responsibility for Channel Functions

• When the manufacturer shifts some functions to intermediaries, the producer’s costs and prices are lower, but the intermediary must add a charge to cover its work.

• If the intermediaries are more efficient than the manufacturer, prices to consumers should be lower.

• If consumers perform some functions themselves, they should enjoy even lower prices.


Channel Levels

• The producer and the final customer are part of every channel.

• We will use the number of intermediary levels to designate the length of a channel.

• Figure 15.2(a) illustrates several consumer-goods marketing channels of different lengths.


Figure 15.2 (a): Consumer Marketing Channels


Channel Levels in Consumer Markets

• A zero-level channel (also called a direct-marketing channel) consists of a manufacturer selling directly to the final consumer.

• A one-level channel contains one selling intermediary such as a retailer.

• A two-level channel contains two intermediaries—a wholesaler and a retailer.

• A three-level channel contains wholesalers, jobbers, and retailers.


Industrial Marketing Channels

• Figure 15.2(b) shows channels commonly used in industrial marketing.

• An industrial-goods manufacturer can use its sales force to sell directly to industrial customers; or it can sell to industrial distributors, who sell to the industrial customers; or it can sell through manufacturer’s representatives or its own sales branches directly to industrial customers, or indirectly to industrial customers through industrial distributors.

• Zero-, one-, and two-level marketing channels are quite common.


Figure 15.2 (b): Industrial Marketing Channels


Reverse Flow Channels

• Channels normally describe a forward movement of products from source to user.

• One can also talk about reverse-flow channels.

• Reverse-flow channels are important in the following cases:i. To reuse products or containersii. To refurbish products for resaleiii. To recycle productsiv. To dispose of products and packaging

• Several intermediaries play a role in reverse-flow channels.


Service Sector Channels

• As the Internet and other technologies advance, service industries such as airlines, hospitality, banking, insurance, stockbroking, and travel are operating through new channels.

• For example, cross-selling opportunities have motivated several mergers and acquisitions in the financial sector worldwide.

• Banks have bought stakes in insurance companies and stockbroking houses to exploit their distribution channels and maximize the merged companies’ products worldwide.


Channels for Person Marketing

• Marketing channels also keep changing in “person” marketing.

• Besides live and programmed entertainment, entertainers, musicians, and other artists can reach prospective and existing fans online in many ways—via their own Web sites, social community sites such as Facebook and Twitter, and third-party Web sites.


Using the Social Media as a Channel

Even politicians, such as Minister Khaw Boon Wan from Singapore, use social networking sites and blogs to update constituents on what is happening in the community.


Channel Design Decisions

To design a marketing channel system, marketers need to:

1. analyze customer needs,

2. establish channel objectives,

3. identify major channel alternatives, and

4. evaluate major channel alternatives.


Analyzing Customers’ Desired Service Output Levels

• Consumers may choose the channels they prefer based on price, product assortment, and convenience, as well as their own shopping goals (economic, social, or experiential).

• Even the same consumer may choose different channels for different functions in a purchase.

• Some consumers are willing to “trade up” or “trade down.”

• The marketing-channel designer knows that providing greater service output means increased channel costs and higher prices for customers.


Channels Produce Five Service Outputs

1. Lot size—The number of units the channel permits a typical customer to purchase on one occasion. Hindustan Unilever targets lower-priced stores to sell its sachet-packaged products because it found that Indian consumers prefer buying smaller pouches of shampoo and detergent than larger packaged ones.

2. Waiting and delivery time—The average time customers of that channel wait for receipt of the goods. Customers increasingly prefer faster delivery channels.



3. Spatial convenience—The degree to which the marketing channel makes it easy for customers to purchase the product. In the U.S., Toyota offers greater spatial convenience than Lexus because there are more Toyota dealers, helping customers save on transportation and search costs in buying and repairing an automobile.

4. Product variety—The assortment breadth provided by the marketing channel. Normally, customers prefer a greater assortment because more choices increase the chance of finding what they need.



5. Service backup—The add-on services (credit, delivery, installation, repairs) provided by the channel. The greater the service backup, the greater the work provided by the channel.


Establishing Objectives and Constraints

• Marketers should state their channel objectives in terms of targeted service output levels.

• Channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs.

• Planners can identify several market segments that want different service levels.


Establishing Objectives and Constraints

• Channel objectives vary with product characteristics.

• Marketers must adapt their channel objectives to the larger environment.

• Channel design must take into account the strengths and weaknesses of different types of intermediaries.

• In entering new markets, firms often closely observe what other firms are doing.


Decision to operate own stores: Apple

• Apple’s channel objectives of creating a dynamic retail experience for consumers was not being met by existing channels, so it chose to open its own stores.

• Apple stores offer a unique brand experience to Apple enthusiasts and prospects.


Four Environmental Issues to Consider for Channels in Asia

1. The underdevelopment of infrastructure in Asia’s larger emerging markets. Consequently, a distribution channel model based on developed-country experiences must be modified to work in Asia. An infrastructure-related problem is the scarcity of market research information to assist in formulating distribution strategies.



2. Economic factors—Some Western MNCs may be interested in buying their regional distributors, switching partners before their competitors, or bypassing their intermediaries. Buying distributors make financial sense if Asian distributors are cheap and attractive to purchase. Bypassing intermediaries enables MNCs to move their goods to market using shorter channels more quickly, ensuring that acceptable marketing or service standards are maintained for customer loyalty and brand image.


Economic Infrastructure and Impact on Distribution

In Asia, unregulated markets and bazaars exist. This makes tracking purchase patterns like in the U.S. challenging.



3. Legal regulations and restrictions—Government regulations and practices can result in distribution difficulties. Such laws have resulted in small-sized stores which has led to many inefficiencies and high costs in the overall retail structure.

4. Consumer lifestyle and population density–For example high population density markets like Hong Kong. Their lifestyle was more suited to daily grocery shopping in a neighborhood store that facilitated the stocking of small quantities of household groceries for the family.


Impact of Local Country Laws on Retailing: Japan

Japanese Large Scale Retail Store Law once inadvertently encouraged small-sized stores of less than 1,500 square meters to be set up, resulting in inefficiencies and high costs.


Impact of Environmental Changes in Asia on Distribution Strategies of Companies

• Given the dynamic nature of the Asian environment, manufacturers should be keenly aware of changes that may impact their distribution strategy.

• Asian nations like China and South Korea have revised tax laws and selectively liberalized their distribution industry to allow foreign participation.

• The entry of foreign retailers should upgrade the standards of, and increase competition in, the distribution industry in these countries.


Impact of Environmental Changes in Asia on Distribution Strategies of Companies

• The increased purchasing power of larger retail chains and manufacturers’ development of their own distribution systems to tap the growing Asian market are expected to diminish the role of the wholesaler in the region.

• As distributors begin to handle fewer product lines, specialization will be more common, thus reducing the potential for channel conflict.


Identifying and Evaluating Major Channel Alternatives

• Each channel has unique strengths as well as weaknesses.

• A channel alternative is described by three elements:

1. The types of available business intermediaries.

2. The number of intermediaries needed.

3. The terms and responsibilities of each channel member.


Types of Intermediaries

• A firm needs to identify the types of intermediaries available to carry on its channel work.

• Companies should search for innovative marketing channels.

• Sometimes a company chooses an unconventional channel because of the difficulty, cost, or ineffectiveness of working with the dominant channel.

• The advantage is that the company will encounter less competition during the initial move into this channel.


Unconventional Channel—AirAsia

• With increased competition and rising costs, Malaysian low-cost carrier AirAsia is the first airline in the world to offer a full booking system via mobile phone.

• Customers anywhere in the world can use their mobile phones to access AirAsia’s Web pages directly and make flight bookings at any time.

• It hopes to win more customers who have mobile phones but may not have easy access to the Internet.

• This unconventional channel also reduces AirAsia’s operating costs by cutting out travel agents and sales offices.


Trading Houses in Asia

• Perhaps the most unique type of intermediary in Asia is the trading house.

• Asian nations have a higher dependency on export trade for their survival.

• These trading houses, called horizontal keiretsu in Japan and hong in Hong Kong, function basically as matchmakers between potential buyers and sellers.

• Examples of trading houses are Japan’s Mitsubishi Corporation and Hong Kong’s Jardine Strategic.


Functions of Trading Houses

• Trading houses provide both parties with negotiating opportunities and participate in the negotiations as mediators, sometimes representing the exporter, and other times, the importer.

• The degree of assistance provided varies depending on exporter-importer characteristics.

• Less experienced importers are given more assistance than more experienced ones by the importer-assisting section of the trading house.

• Similarly, less experienced exporters are given more assistance than more experienced ones by the exporter-assisting section of the trading house.


Number of Intermediaries

Three strategies are available:

A. exclusive distribution,

B. selective distribution, and

C. Intensive distribution.


Exclusive Distribution

• Exclusive distribution means severely limiting the number of intermediaries.

• It is used when the producer wants to maintain control over the service level and outputs offered by the resellers.

• Often it involves exclusive dealing arrangements.

• By granting exclusive distribution, the producer hopes to obtain more dedicated and knowledgeable selling.

• It requires greater partnership between seller and reseller and is used in the distribution of new automobiles, some major appliances, and some women’s apparel brands.


Selective Distribution

• Selective distribution relies on only some of the intermediaries willing to carry a particular product.

• It is used by established companies and by new companies seeking distributors.

• The company does not have to worry about too many outlets; it can gain adequate market coverage with more control and less cost than intensive distribution.


Intensive Distribution

• Intensive distribution places the goods or services in as many outlets as possible.

• This strategy is generally used for items such as tobacco products, soap, snack foods, and gum—products for which the consumer requires a great deal of location convenience.

• In China, popular outlets like wet markets, convenience stores, and supermarkets are situated within 10 minutes’ walking distance from consumers’ homes.

• In Indonesia, Unilever has built a network of nearly 20,000 distributors and two million retailers.


Intensive Distribution: Convenience Stores

Convenience stores such as 7-Eleven and Circle K survive by selling items that provide location and time convenience.


Shifting Distribution Intensities

• Manufacturers are constantly tempted to move from exclusive or selective distribution to more intensive distribution to increase coverage and sales.

• This strategy may help in the short term, but often hurts long-term performance.

• Intensive distribution increases product and service availability but may also result in retailers competing aggressively.

• If price wars ensue, retailer profitability may also decline, potentially dampening retailer interest in supporting the product and harming brand equity.


Terms and Responsibilities of Channel Members

• Each channel member must be treated respectfully and given the opportunity to be profitable.

• 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


Evaluating the Major Alternatives

Each channel alternative needs to be evaluated against economic, control, and adaptive criteria.


Economic Criteria

• Each channel will produce a different level of sales and costs.

• Firms will try to align customers and channels to maximize demand at the lowest overall cost.

• Sellers try to replace high-cost channels with low-cost channels as long as the value added per sale is sufficient.

• See Figure 15.3.


Figure 15.3: The Value-add versus Costs of Different Channels


Comparing Costs of A Sales Agency versus Setting Up One’s Own Sales Office

• The next step is to estimate the costs of selling different volumes through each channel.

• The cost schedules are shown in Figure 15.4.

• The fixed costs of engaging a sales agency are lower than those of establishing a company sales office, but costs rise faster through an agency because sales agents get a larger commission than company salespeople.

• The final step is comparing sales and costs.


Comparing Costs of A Sales Agency versus Setting Up One’s Own Sales Office

• As Figure 15.4 shows, there is one sales level (SB) at which selling costs are the same for the two channels.

• The sales agency is thus the better channel for any sales volume below SB, and the company sales branch is better at any volume above SB.

• Given this information, it is not surprising that sales agents tend to be used by smaller firms, or by large firms in smaller territories where the volume is low.


Sales Office Branch or Sales Agency?

• The first step is to determine whether a company sales force or a sales agency will produce more sales.

• Most marketing managers believe that a company sales force will sell more. They concentrate on the company’s products; they are better trained to sell those products; they are more aggressive because their future depends on the company’s success and they are more successful because many customers prefer to deal directly with the company.


Sales Office Branch or Sales Agency?

However, the sales agency could conceivably sell more. Some customers prefer dealing with agents who represent several manufacturers rather than with salespersons from one company; and the agency has extensive contacts and marketplace knowledge, whereas a company sales force would need to build these from scratch.


Figure 15.4: Break-even Cost Chart for the Choice Between a Company Sales Force and a Manufacturer’s Sales Agency


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.

• Yet these commitments invariably lead to a decrease in the producer’s ability to respond to a changing marketplace.

• In rapidly, changing, volatile, or uncertain product markets, the producer needs channel structures and policies that provide high adaptability.


Channel-Management Decisions

• After a company has chosen a channel system, it must select, train, motivate, and evaluate individual intermediaries for each channel.

• It must also modify channel design and arrangements over time.


Selecting Channel Members

• To customers, the channels are the company. Companies need to select their channel members carefully.

• To facilitate channel member selection, producers should determine what characteristics distinguish better intermediaries.


Evaluative Criteria in Selecting Channel Members

They should evaluate the:

1. Number of years in business2. Other lines carried3. Growth and profit records4. Financial strength5. Cooperativeness6. Service reputation


Selecting Channel Members

• If the intermediaries are sales agents, producers should evaluate the number and character of other lines carried and the size and quality of the sales force.

• If the intermediaries are department stores that want exclusive distribution, the producer should evaluate locations, future growth potential, and type of clientele.


Training and Motivating Channel Members

• A company needs to determine intermediaries’ needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries.

• Stimulating channel members to top performance starts with understanding their needs and wants.

• The company should provide training programs and market research programs to improve intermediaries’ performance.

• The company must constantly communicate its view that the intermediaries are partners in a joint effort to satisfy end users of the product.


Channel Power

• Producers vary greatly in skill in managing distributors.

• Channel power can be defined as the ability to alter channel members’ behavior resulting in actions they would not have taken otherwise.


Types of Channel Power

1. Coercive power—A manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. This power can be effective, but its exercise produces resentment and can generate conflict and lead the intermediaries to organize countervailing power.

2. Reward power—The manufacturer offers intermediaries an extra benefit for performing specific acts or functions. Reward power typically produces better results than coercive power, but can be overrated. The intermediaries may come to expect a reward every time the manufacturer wants a certain behavior to occur.



3. Legitimate power—The manufacturer requests a behavior that is warranted under the contract. As long as the intermediaries view the manufacturer as a legitimate leader, legitimate power works.

4. Expert power—The manufacturer has special knowledge that the intermediaries value. However, once the expertise is passed on to the intermediaries, this power weakens. The manufacturer must continue to develop new expertise so that the intermediaries will want to continue cooperating.



5. Referent power—The manufacturer is so highly respected that intermediaries are proud to be associated with it. Companies such as McDonald’s, Singapore Airlines, and Sony have high referent power.


Expert Power – Uniqlo

Uniqlo’s takumi team of experienced textile craftsmen gives Uniqlo expert power over its factories as they offer expertise on how to solve manufacturing problems.


Nature of Channel Powers

• Coercive and reward power are objectively observable.

• Legitimate, expert, and referent power are more subjective and dependent on the ability and willingness of parties to recognize them.

• Most producers see gaining intermediaries cooperation as a huge challenge.

• Companies that are more sophisticated try to forge a long-term partnership with distributors.


Efficient Consumer Response Practices (ECR)

To streamline the supply chain and cut costs, many manufacturers and retailers have adopted efficient consumer response practices (ECR) to organize their relationships in three areas:

1. demand side management or collaborative practices

2. supply side management to optimize supply

3. enablers and integrators, to support joint activities that reduce operational problems


Wal-Mart and Li & Fung

Wal-Mart entered a procurement deal with Li & Fung to optimize its sourcing portfolio and reduce costs.


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.


Modifying Channel Design and Arrangements

• No channel strategy remains effective over the whole product life cycle.

• In competitive markets with low entry barriers the optimal structure will inevitably change over time.

• The change could mean adding or dropping individual market channels or channel members or developing a totally new way to sell goods.


Channel Evolution

• A new firm typically starts as a local operation selling in a fairly circumscribed market, using a few existing intermediaries.

• Identifying the best channels might not be a problem; the problem is often to convince the available intermediaries to handle the firm’s line.


Channel Evolution

• If the firm is successful, it might branch into new markets with different channels. In smaller markets, the firm might sell directly to retailers; in larger markets, through distributors.

• In rural areas, it might work with general-goods merchants; in urban areas, with limited-line merchants. It might grant exclusive franchises or sell through all willing outlets.


Channel Modification Decisions

• A producer must periodically review and modify its channel design and arrangements.

• The distribution channel may not work as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channels emerge, and the product moves into later stages in the product life cycle.

• Adding or dropping individual channel members requires an incremental analysis. Increasingly detailed customer databases and sophisticated analysis tools can provide guidance into those decisions.


Challenges of Modifying Channel Strategy

• Perhaps the most difficult decision involves revising the overall channel strategy.

• Avon’s door-to-door system for selling cosmetics was modified as more women entered the workforce.

• Despite the convenience of automated teller machines, online banking, and telephone call centers, many bank customers still want “high touch” over ““high tech,” or at least they want the choice.

• Banks are thus opening more branches and developing cross-selling and up-selling practices to capitalize on the face-to-face contact that results.


Global Channel Considerations

• International markets pose distinct challenges, including variations in customers’ shopping habits, but create opportunities at the same time.

• The first step in global channel planning, as is often the case in marketing, is to get close to customers.

• A good retail strategy that offers customers a positive shopping experience and unique value, if properly adapted, is likely to find success in more than one market.


Global Expansion Opportunities

• International markets pose distinct challenges, including variations in customers’ shopping habits, but opportunities at the same time.

• Many global retailers such as United Kingdom’s Tesco and Spain’s Zara have tailored their image to local needs and wants when entering a new market.

• A good retail strategy that offers customers a positive shopping experience and unique value, if properly adapted, is likely to find success in more than one market.


Franchising Operations

• Franchised companies such as Subway sandwich shops have experienced double-digit growth overseas, especially in developing markets.

• In some cases, master franchisees pay a significant fee to acquire a territory or country where they operate as a “mini-franchiser” in their own right.

• More knowledgeable about local laws, customs, and customer needs than foreign companies, they sell and oversee franchises and collect royalties.


Global Challenges of Channel Strategy

Carrefour had expansion problems in some countries like Japan and South Korea, and faced competition from IKEA in its home market, France.


Channel Integration and Systems

• Distribution channels don’t stand still.

• New wholesaling and retailing institutions emerge, and new channel systems evolve.

• There are three main systems to study: vertical, horizontal, and multichannel marketing systems.


Vertical Marketing Systems

• A conventional marketing channel comprises an independent producer, wholesaler(s), and retailer(s). Each is a separate business seeking to maximize its own profits, even if this goal reduces profit for the system as a whole. No channel member has complete or substantial control over other members.

• A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, owns the others or franchises them or has so much power that they all cooperate.


Vertical Marketing Systems

• VMSs arose as a result of strong channel members’ attempts to control channel behavior and eliminate the conflict that results when independent members pursue their own objectives.

• VMSs achieve economies through:

–Size

–Bargaining power

– The elimination of duplicated services


Three Types of Vertical Marketing Systems (VMS)

1. Corporate

2. Administered

3. Contractual


Corporate VMS

• A corporate VMS combines successive stages of production and distribution under single ownership.

• Toyota is a good example of backward corporate vertical integration as it holds equity stakes in key suppliers.

• In contrast, sales-distribution keiretsu involves forward vertical integration from the factory to retail outlets.


Administered VMS

• An administered VMS coordinates successive stages of production and distribution through the size and 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.


Administered VMS

• 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

• A 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.


Types of Contractual VMS

• Wholesaler-sponsored voluntary chains:

–Wholesalers organize voluntary chains of independent retailers to help them compete with large chain organizations. The wholesaler develops a program in which independent retailers standardize their selling practices and achieve buying economies that enable the group to compete effectively with chain organizations.



• Retailer cooperatives:

–Retailers take the initiative and organize a new business entity to carry on wholesaling and possibly some production. Members concentrate their purchases through the retailer co-op and plan their advertising jointly. Profits are passed back to members in proportion to their purchases.



• Franchise organizations:

–A channel member called a franchisor might link several successive stages in the production-distribution process. Franchising has been the fastest-growing retailing development in recent years. Although the basic idea is an old one, some forms of franchising are quite new.


Types of Franchising

• The traditional system is the manufacturer-sponsored retailer franchise. Toyota, for example, licenses dealers to sell its cars. The dealers are independent businesspeople who agree to meet specified conditions of sales and services.

• Another is the manufacturer-sponsored wholesaler franchise. Coca-Cola, for example, licenses bottlers (wholesalers) in various markets who buy its syrup concentrate and then carbonate, bottle, and sell it to retailers in local markets.


Types of Franchising

A newer system is the service-firm-sponsored retailer franchise. A service firm organizes a whole system for bringing its service efficiently to consumers. Examples are found in the car rental business (Avis, Hertz) and fast-food-service business (McDonald’s, Burger King).


The New Competition in Retailing

• Many independent retailers that have not joined VMSs have developed specialty stores that serve special market segments.

• The result is a polarization in retailing between large vertical marketing organizations and independent specialty stores, which creates a problem for manufacturers.

• They are strongly tied to independent intermediaries, but must eventually realign themselves with the high-growth vertical marketing systems on less attractive terms.


The New Competition in Retailing

• Vertical marketing systems constantly threaten to bypass large manufacturers and set up their own manufacturing.

• 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.


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.

• Some supermarket chains have arrangements with local banks to offer in-store banking.

• Each company lacks the capital, know-how, production, or marketing resources to venture alone, or is afraid of the risk.

• The companies might work with each other on a temporary or permanent basis or create a joint venture company.


Integrating Multichannel 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.

• An integrated marketing channel system is one in which the strategies and tactics of selling through one channel reflect the strategies and tactics of selling through other channels.


Multichannel Marketing

Luxury goods maker Coach has a variety of carefully selected and managed channel options.


Distribution stakeholders also include many local retailers, restaurants, and other enterprises that can reach final consumers.

Coke approached some Chinese neighborhood committees to sell its products. These committees are made up of pensioners who serve as socialist guardians. They have proven to be useful vehicles for building brand awareness.


Benefits of Adding More Channels

By adding more channels, companies can gain three important benefits.

1.The first is increased market coverage.

2.The second is lower channel cost—selling by phone rather than personal visits to small customers.

3.The third is more customized selling—adding a technical sales force to sell more complex equipment.


Risks of Adding More Channels

a. New channels typically introduce conflict and control problems.

b. Two or more channels may end up competing for the same customers.

c. The new channel may be more independent and make cooperation more difficult.


Channel Architecture

• Companies need to think through their channel architecture. They must determine which channels should perform which functions.

• Figure 15.5 shows a simple grid to help make channel architecture decisions. The grid consists of major marketing channels (as rows) and the major channel tasks that must be completed (as columns).

• Multichannel marketers also need to decide how much of their product to offer in each of the channels.


Figure 15.5: The Hybrid Grid


Channel Architecture

• The grid illustrates why using only one channel is not efficient.

• Companies should use different channels for selling to different size customers.

• A company can use its direct sales force to sell to large customers, telemarketing to sell to midsize customers, and distributors to sell to small customers; but these gains can be compromised by an increased level of conflict over who has account ownership.

• For example, territory-based sales representatives may want credit for all sales in their territories, regardless of the marketing channel used.


Conflict, Cooperation, and Competition

• Channel conflict is generated when one channel member’s actions prevents the channel from achieving its goal.

• Channel coordination occurs when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals.


Types of Conflict and Competition

• Horizontal channel conflict involves conflict between members at the same level within the channel.

• Vertical channel conflict means conflict between different levels within the same channel.

• Multi-channel conflict exists when the manufacturer has established two or more channels that sell to the same market. –Multi-channel conflict is likely to be especially intense when the

members of one channel get a lower price (based on larger volume purchases) or work with a lower margin.


Causes of Channel Conflict

1. Goal incompatibility—The manufacturer may want to achieve rapid market penetration through a low-price policy. Dealers, in contrast, may prefer to work with high margins and pursue short-run profitability.

2. Unclear roles and rights—Hewlett-Packard may sell personal computers to large accounts through its own sales force, but its licensed dealers may also be trying to sell to large accounts. Territory boundaries and credit for sales often produce conflict.


Causes of Channel Conflict

3. Differences in perception—The manufacturer may be optimistic about the short-term economic outlook and want dealers to carry higher inventory. Dealers may be pessimistic.

4. Intermediaries’ dependence on the manufacturer—The fortunes of exclusive dealers, such as auto dealers, are profoundly affected by the manufacturer’s product and pricing decisions. This situation creates a high potential for conflict.


Managing Channel Conflict

• Some channel conflict can be constructive and lead to better adaptation to a changing environment, but too much is dysfunctional.

• The challenge is not to eliminate conflict but to manage it better.

• There are several mechanisms for effective conflict management. See Table 15.2.


Table 15.2: Strategies to Manage Channel Conflict


Strategies to Manage Channel Conflict

1. Strategic justification—In some cases, a convincing strategic justification that they serve distinctive segments and do not compete as much as they might think can reduce potential for conflict among channel members. Developing special versions of products for different channel members is a clear way to demonstrate that distinctiveness.

2. Dual compensation—Dual compensation pays existing channels for sales made through new channels.



3. Superordinate goals—Channel members can come to an agreement on the fundamental or superordinate goal they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction. They usually do this when the channel faces an outside threat, such as more efficient competing channels, an adverse piece of legislation, or a shift in consumer desires.

4. Employee exchange—A useful step is to exchange persons between two or more channel levels.



5. Joint memberships—Similarly, marketers can encourage joint memberships in trade associations.

6. Co-optation—Co-optation is an effort by one organization to win the support of the leaders of another by including them in advisory councils and board of directors.



7. Diplomacy, mediation, and arbitration—When conflict is chronic or acute, the parties may need to resort to stronger means. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation relies on a neutral third party skilled in conciliating the two parties’ interests. In arbitration, two parties agree to present their arguments to one or more arbitrators and accept their decision.

8. Legal recourse—If nothing else proves effective, a channel partner may choose to file a lawsuit.


Dilution and Cannibalization

• Marketers must also be careful not to dilute their brands through inappropriate channels, particularly luxury brands whose images often rest on exclusivity and personalized service.

• Example: Impact of the Internet on Shopping for Luxury Goods


Dilution and Cannibalization

134

• To help tap into affluent shoppers who work long hours and have little time to shop, high-end fashion brands such as Dior, Louis Vuitton, and Fendi have unveiled e-commerce sites.

• These luxury makers also see their Web sites as a way for customers to research items before walking into a store and a means to help combat fakes sold over the Internet.

• Given the lengths these brands go to pamper their customers in their stores—doormen, glasses of champagne, extravagant surroundings—they have had to work hard to provide a high quality experience online.

© Pearson Education South Asia Pte Ltd 2013. All rights reserved

Legal and Ethical Issues in Channel Relations

• Companies are legally free to develop whatever channel arrangements suit them.

• In fact, the law seeks to prevent companies from using exclusionary tactics that might keep competitors from using a channel.

• Many producers like to develop exclusive channels for their products.

• When the seller requires that these dealers not handle competitors’ products, this is called exclusive distribution.



• Exclusive distribution is legal as long as they do not substantially lessen competition or tend to create a monopoly, and as long as both parties enter into the agreement voluntarily.

• Exclusive distribution often includes exclusive territorial agreements.

– The producer may agree not to sell to other dealers in a given area.

– 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.


Gray Marketing

• The practice of gray marketing or parallel importing.

• This involves the sale of authorized, branded products through unauthorized channels.

• While counterfeiting (or black marketing) is illegal, gray marketing is in many cases legal and occurs frequently in Asia.

• The major suppliers of parallel imports include authorized intermediaries (often in other markets), professional arbitragers like trading houses, and manufacturers (either through their headquarters or foreign divisions).


Parallel Imports or Gray Markets: Mercedes Benz

Parallel imports or gray markets of Mercedes Benz can be found in Asia. Parallel importers offer a lower price but may not offer as comprehensive a service as the authorized dealers


Factors Giving Rise to the Growth of Gray Marketing

1. Differential pricing to different channel members may lead to a distributor over-ordering to obtain a discount and then selling off the excess to unauthorized channels.

2. Manufacturers may price differently to different geographic markets due to differences in tax, exchange rates, or price sensitivity. This enables parallel importers to buy from the cheapest source worldwide and, in some cases like China, smuggle the goods to avoid duty. This provides a cost advantage to parallel importers over authorized dealers who must bear the cost of advertising and promotion.



3. Products may be sold through high-service, high-price channels, providing an opportunity to introduce gray markets through discount retailers. Japanese discount chain Jonan Denki takes employees on post-Christmas European shopping trips to legally purchase large quantities of luxury brands for sale in its stores.



4. The development of emerging markets and worldwide trade liberalization create incentives for firms to capitalize on their brand equity and volume potential by offering similar products across different countries. However, this leads to substantial price variation across nations due to differences in exchange rates, purchasing power, and supply-side factors (e.g., distribution and servicing).


Actions Taken to Control Parallel Importing

• Manufacturers may stop parallel importing by taking legal action where possible, checking their own order-processing procedures, keeping track of their products, and limiting differential pricing policies to reduce or prevent arbitrage opportunities.

• They may also police their distributors, raise their prices to lower-cost intermediaries, or alter product or service features for different channels.

• However, the costs and benefits of gray marketing should be considered before taking any action.


Manufacturers may tolerate gray marketing where:

1. violations are difficult to detect or document

2. the potential for one channel to free-ride on another member is low

3. the product is mature

4. the parallel importer is a high-performing dealer loyal to the manufacturer rather than one which carries competing brands in the manufacturer’s product category


Taking Advantage of Gray Markets

• Some manufacturers actually welcome gray markets as these increase their coverage in emerging markets, pressure authorized channels to compete harder, and avail the product to price-sensitive consumers.

• This occurs for hard liquor, cigarettes, and other fast-moving consumer goods in China, Indonesia, and Vietnam.


Taking Advantage of Gray Markets

• While ethically questionable, the objective is to achieve a substantial market share and brand recognition with products sold relatively cheaply from the non payment of customs duties.

• Such manufacturers can also simultaneously reap the benefit from the image of an imported brand with perceived superior quality.


E-Commerce Marketing Practices

• E-commerce uses a Web site to transact or facilitate the sale of products and services online.

• Online retail sales have exploded in recent years, and it is easy to see why.

• Online retailers can predictably provide convenient, informative, and personalized experiences for vastly different types of consumers and businesses.

• We can distinguish between pure-click companies, those that have launched a Web site without any previous existence as a firm, and brick-and-click companies, existing companies that have added an online site for information and/or e-commerce.


Pure-Click Companies

• There are several kinds of pure-click companies:

i. search enginesii. Internet Service Providers

(ISPs)iii. commerce sitesiv. transaction sitesv. content sitesvi. enabler sites.


Pure-Click Companies

• Commerce sites sell all types of products and services, notably books, music, toys, insurance, stocks, clothes, financial services, and so on.


Online Mall – Taobao

Taobao Mall is China’s largest online marketplace. Samsung, Levi’s, and adidas use Taobao to sell their products online.


E-Commerce Success Factors

• Companies must set up and operate their e-commerce Web sites carefully. Customer service is critical.

• Online shoppers may select an item for purchase but fail to complete the transaction.

• Consumer surveys suggest that the most significant inhibitors of online shopping are the absence of pleasurable experiences, social interaction, and personal consultation with a company representative.



• Some companies use live online chat to give potential customers immediate advice about products for sale on their Web sites. Another benefit of providing live sales assistance is the ability to sell additional items.

• To increase the entertainment and information value and the customer satisfaction from Web-based shopping experiences, some firms are employing avatars, graphical representations of virtual, animated characters that can act as company representatives.



• Ensuring security and privacy online remains important. Customers must find the Web site trustworthy, even if it represents an already highly credible offline firm.

• Online retailers are also trying new technologies, such as blogs, social networks, and mobile marketing, to attract new shoppers.


B2B E-Commerce

• Although business-to-consumer (B2C) Web sites have attracted much attention in the media, even more activity is being conducted on business-to-business (B2B) sites, which are changing the supplier-customer relationship in profound ways.

• In the past, buyers exerted a lot of effort to gather information about worldwide suppliers.


B2B E-Commerce

• With the Internet, buyers have easy access to a great deal of information.

• They can get information from:a. supplier Web sitesb. infomediaries, third parties that add value by aggregating

information about alternativesc. market makers, third parties that create markets linking buyers

and sellersd. customer communities, Web sites where buyers can swap

stories about suppliers’ products and services


B2B E-Commerce – Alibaba

Alibaba is the largest online B2B marketplace. It is home-grown in China, a country where businesses have faced decades of Communist antipathy to private enterprise.


Benefits of B2B E-Commerce

• The effect of these mechanisms is to make prices more transparent.

• In the case of undifferentiated products, price pressure will increase.

• For highly differentiated products, buyers will gain a better picture of the items’ true value.

• Suppliers of superior products will be able to offset price transparency with value transparency; suppliers of undifferentiated products will need to drive down their costs in order to compete.


Brick-and-Click Companies

• Although many brick-and-mortar companies may have initially debated whether to add an online e-commerce channel for fear of channel conflict with their off-line retailers, agents, or their own stores, most eventually added the Internet as a distribution channel after seeing how much business was generated online.

• Adding an e-commerce channel creates the threat of a backlash from retailers, brokers, agents, or other intermediaries.

• The question is how to sell both through intermediaries and online.


Gaining Acceptance for Online E-Commerce Channel from Intermediaries

There are at least three strategies for trying to gain acceptance from intermediaries:

i. Offer different brands or products on the Internet.

ii. Offer the off-line partners higher commissions to cushion the negative impact on sales.

iii. Take orders on the Web site but have retailers deliver and collect payment.


Decisions on Deploying Online e-Commerce Channel

• 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

• The widespread penetration of cell phones and smart phones—there are currently more mobile phones than personal computers in the world—allows people to connect to the Internet and place online orders on the move.

• Many see a big future in what is now called m-commerce (m for mobile). The existence of mobile channels and media can keep consumers connected and interacting with a brand throughout their day-to-day lives.

• GPS-type features can help identify shopping or purchase opportunities for consumers for their favorite brands.


M-Commerce—Japan

• In some countries, m-commerce already has a strong foothold.

• Millions of Japanese teenagers carry DoCoMo phones available from NTT (Nippon Telephone and Telegraph).

• They can also use their phones to order goods.

• Each month, the subscriber receives a bill from NTT listing the monthly subscriber fee, the usage fee, and the cost of all the transactions.

• Bills can be paid at the nearest 7-Eleven store.


M-Commerce—Japan

• In Japan, m-commerce is popular as the mobile phone is used to buy almost anything from concert tickets to canned drinks from the vending machine.


M-Commerce Applications

• Retailers such as Amazon have launched m-commerce sites that allow consumers to buy books, medicine, and even lawn mowers from their smart phones.

• The travel industry has used m-commerce to target businesspeople who need to book air or hotel reservations while on the move.

• Mobile marketing can have influence inside the store too. Consumers increasingly are using a cell phone to text a friend or relative about a product while shopping.


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Mma6e chapter-15 final

Business

Transcript of Mma6e chapter-15 final