Anne T. Coughlan, Northwestern University
Erin Anderson, INSEAD
Louis W. Stern, Northwestern University
Adel I. El-Ansary, University of North Florida
FIGURE 1-1: CONTACT COSTS TO REACH THE MARKET WITH AND WITHOUT
INTERMEDIARIES
Manufacturers
Selling
Directly
40 Contact Lines
Retailers
Manufacturers
Selling Through One Wholesaler
Wholesaler
Retailers
Manufacturers
14 Contact Lines
Selling Through Two Wholesalers
Wholesalers
28 Contact Lines
Retailers
FIGURE 1.2: MARKETING FLOWS IN CHANNELS
Producers
Physical
Possession
Ownership
Physical
Possession
Ownership
Physical
Possession
Ownership
Promotion
Promotion
Promotion
Negotiation
Financing
Wholesalers
Negotiation
Financing
Retailers
Negotiation
Financing
Risking
Risking
Risking
Ordering
Ordering
Ordering
Payment
Payment
Payment
Commercial Channel Subsystem
Consumers
Industrial
and
Household
FIGURE 1-3: FRAMEWORK FOR CHANNEL DESIGN AND IMPLEMENTATION
Channel Design Process:
SEGMENTATION:
Recognize and respond to target
customers’
service output demands
Channel Implementation Process:
CHANNEL POWER:
Identify sources for all
channel members
Decisions About
Efficient Channel Response:
CHANNEL STRUCTURE:
What kinds of intermediaries are in my
channel?
Who are they?
How many of them?
SPLITTING THE WORKLOAD:
With what responsibilities?
DEGREE OF COMMITMENT:
Distribution alliance?
Vertical integration/ownership?
GAP ANALYSIS:
What do I have to change?
CHANNEL CONFLICT:
Identify actual and
potential sources
MANAGE/DEFUSE CONFLICT:
Use power sources
strategically, subject to legal
constraints
GOAL:
Channel Coordination
INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:
Retailing, Wholesaling and Logistics, Franchising
TABLE 1-1: SERVICE OUTPUT DEMAND DIFFERENCES
(an example of segmentation in the book-buying market)
Browser buying best-sellers to take on vacation
Descriptor
Service Output
Demand Level
Student buying textbooks for fall semester at college
Descriptor
Service Output
Demand Level
Bulkbreaking
“I’m looking for some ‘good read’
paperbacks to enjoy.”
Medium
“I only need one copy of my
Marketing textbook!”
High
Spatial
convenienc
e
“I have lots of errands to run before
leaving town, so I’ll be going past
several bookstores.”
Medium
“I don’t have a car, so I can’t
travel far to buy.”
High
Waiting
and
delivery
time
“I’m not worried about getting the
books now… I can even pick up a
few when I’m out of town if need
be.”
Low
“I just got to campus, but classes
are starting tomorrow and I’ll
need my books by then.”
High
Assortment
and variety
“I want the best choice available, so
that I can pick what looks good.”
High
“I’m just buying what’s on my
course reading list.”
Low
Customer
service
“I like to stop for a coffee when book
browsing.”
High
“I can find books myself, and
don’t need any special help.”
Low
“I value the opinions of a well-read
bookstore employee; I can’t always
tell a good book from a bad one
before I buy.”
High
“My professors have already
decided what I’ll read this
semester.”
Low
Informatio
n provision
Channel Design
Process:
Channel Implementation
Process:
SEGMENTATION: Chapter 2
CHANNEL POWER:
Chapter 6

CHANNEL CONFLICT:
Chapter 7
Decisions About
Efficient Channel Response:
CHANNEL STRUCTURE:
Chapter 4
SPLITTING THE WORKLOAD:
Chapter 3
DEGREE OF COMMITMENT:
Chapters 8, 9
GAP ANALYSIS:
Chapter 5
MANAGE/DEFUSE CONFLICT:
Chapters 6, 7, 8, 9, 10
GOAL:
Channel Coordination
INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:
Chapters 11, 12, 13
TABLE 2-1: ESTIMATED NUMBER OF U.S. CONSUMERS USING ONLINE BILL
PAYMENT, VARIOUS YEARS
YEAR
# U.S. CONSUMERS PAYING AT LEAST 1
BILL ONLINE (millions, est.)
% OF U.S. POPULATION (est.)
1998
3.4
1.3%
…
…
…
2001
20.4
7.3%
2002
25.5
9.1%
2003
35
12.5%
2004
65
23%
Notes:
1998: in 1998, just 2% of U.S. households used online bill payment, according to Tower Group (Bielski 2003). From U.S. Census data,
in 1998, there were 100 million households in the U.S., with an average of 1.7 adults per household; thus, 2 million households or
3.4 million adults were using online bill payment in 1998.
2001: A Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002, up 41 percent from 2001
numbers (Higgins 2002). Thus, in 2001, 12 million U.S. households paid bills online. From U.S. Census data, there were 108 million
households in the U.S., with an average of 2.58 adults per household; thus, there were 20.4 million adults using online bill payment
in 2001.
2002: The same Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002 (Higgins 2002),
while a Tower Group report said that 13.7% of U.S. households did pay bills online in 2002 (Bielski 2003). The table therefore
reports the numbers from Bielski. There were 109 million households in the U.S. in 2002; thus, 15 million households paid bills
online. Further, there were an average of 2.58 adults per household in the U.S. in 2002 (from U.S. Census data), yielding the
estimate of 25.5 million adult online bill payers in 2002.
2003 and 2004: A Gartner study cites 65 million U.S. consumers paying at least some bills online, and reports this is almost twice as
many as in 2003 (Park, Elgin et al. 2004). We therefore estimate that 35 million U.S. consumers paid bills online in 2003.
OPTION:
Paper Bill Payment
Direct Biller Online Pay
Third-Party Online Bill Payer (e.g. bank,
Quicken)
SET-UP
PROCESS:
None
Consumer logs on to biller’s website;
Enters information about account, name, bank
account fr/which payment will be made, etc.;
Picks a password, specific to this website, to
gain access in future;
Activation usually occurs within 24 hours
Consumer logs on to third-party website;
Enters information about each account
individually;
Picks a password, specific to this site but common
across all bills paid at this site, to gain access in
future
BILL PRESENTMENT TO
CONSUMER:
Consumer receives bill through
U.S. mail in envelope containing
summary of bill charges & due
date, payment stub, & payment
envelope
Either through U.S. mail (see paper bill) or
electronic bill presentment through e-mail
alert; both note payment due date
Arrival of electronic bill noted through e-mail
alert;
Third party may/may not offer actual bill
presentment
CONSUMER
BILL REVIEW
AND PAYMENT
AUTHORIZATION:
Consumer reconciles bill with
paper receipts; fills out payment
stub; writes paper check; inserts
check and stub in envelope; puts
U.S. first-class stamp on
envelope; mails payment
Consumer reconciles bill with receipts;
Visits biller website’s payment page;
Enters amount and date of payment;
[website indicates how fast payment will be
made]
Consumer visits third party’s website to view bill
(if no presentment by third party) and reconcile;
Enters amount and date of payment (may need up
to 5 days to clear payment)
CONFIRMATION OF
PAYMENT TO
CONSUMER:
Only when next bill is received
does consumer learn if previous
payment was received in time
(unless consumer telephones
biller)
Typically, e-mail confirmation of payment
receipt the day payment is recorded
Typically, e-mail confirmation that payment was
made
COST TO
CONSUMER:
Cost of first-class stamp;
No cost to learn system;
Cost of time to process bill &
write check;
Cost of paper check;
Risk-adjusted cost of late payment
(perceived very low)
No monthly fee for payment
processing
No stamp;
Initial learning time, for each biller’s system;
Cost of time to check bill’s accuracy;
No check writing or cost;
Risk-adjusted cost of late payment (perceived
low);
No monthly fee for payment processing
No stamp;
Initial learning time, once for whole system;
Cost of time to check bill’s accuracy;
No check writing or cost;
Risk-adjusted cost of late payments (moderate: up
to 5 days to clear payment)
May be a monthly fee (e.g., Quicken: $9.95/month
for up to 20 bills, plus $2.49 per 5 bills thereafter;
but many banks now do not charge for service);
May be low cost to integrate with home financial
records (e.g., Quicken financial software program)
Respondents allocated 100 points among the following supplier-provided service outputs according to their importance to their c
= Greatest Discriminating
Attributes
Lowest Total Cost/
Possible Service
Pre-Sales Info
Output Priorities
Segment
Responsive Support/
Post-Sales Segment
= Additional Important
Attributes
Full-Service
References and
Relationship Segment
Credentials Segment
References and Credentials
5
4
6
25
Financial Stability and
Longevity
4
4
5
16
Product Demonstrations &
Trials
11
10
8
20
Proactive Advice & Consulting
10
9
8
10
Responsive Assistance During
Decision Process
14
9
10
6
4
1
18
3
Lowest Price
32
8
8
6
Installation and Training
Support
10
15
12
10
Responsive Problem Solving
After Sale
8
29
10
3
Ongoing Relationship with a
Supplier
1
11
15
1
100
100
100
100
16%
13%
61%
10%
One-Stop Solution
Total
% Respondents
Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.
FIGURE 2-1: IDEAL CHANNEL SYSTEM FOR BUSINESS-TO-BUSINESS SEGMENTS
BUYING A NEW HIGH-TECHNOLOGY PRODUCT
Manufacturer
(New High Technology Product)
Associations,
Events,
Awareness
Efforts
Pre-Sales
Dealers
Sales
TeleSales/
TeleMktg
VARs
Internal Support
- Install, Training & Service
Group
Post-Sales
Segment
Full-Service
Responsive
Support
References/
Credentials
ThirdParty
Supply
Outsource
Lowest
Total
Cost
Source: Reprinted with permission of Rick Wilson,
Chicago Strategy Associates, 2000.
Buyer’s Location
Shipping Method
Shipping Charge
Time to Delivery
United States
Standard UPS
$11.95
3 to 5 business days
Mexico
Surface Mail
$20.00
8 to 12 weeks
Mexico
Priority Air
$30.00
2 to 4 weeks
Mexico
UPS
$50.00
1 to 2 weeks
Source: www.landsend.com website.
FIGURE 2-2: ADVERTISING COPY FOR AN AD FOR BN.COM
Advertising Copy
Service Output Offered
“Really free shipping”: offers free shipping if 2 or more items
are purchased. “We make it easy and simple.”
Customer service
“Fast & easy returns”: end-user can return unwanted books to a
bricks-and-mortar Barnes & Noble bookstore. “Just try and
return something to a store that isn’t there.”
Quick delivery (for returns), spatial convenience; note implicit
comparison with amazon.com, the pure-play online bookseller
“Books not bait”: promises no additional sales pitches to buy
non-book products.
Assortment/variety: just books (targeting the book lover). Again,
note implicit comparison with amazon.com.
“Same day delivery in Manhattan”: delivery by 7:00 p.m. on any
item(s) ordered by 11:00 a.m. that day. “No other online
bookseller offers that.”
Quick delivery: the offer is possible because of Barnes &
Noble’s warehouses in New Jersey, near Manhattan. Note direct
comparison with other online booksellers (notably, amazon.com)
“The gift card that gives more”: can be used either online or in
the bricks-and-mortar bookstores, nationwide.
Spatial convenience, assortment/variety: when buying a gift for a
friend, this provides virtually limitless assortment, and does so
anywhere the recipient lives in the United States.
“bn.com – 1,000,000 titles; amazon.com – 375,000 titles”
Assortment/variety: direct comparison with amazon.com,
offering a broader assortment of titles to the consumer
Source: advertisement for bn.com in Wall Street Journal,
November 20, 2002, p. A11.
SERVICE OUTPUT DEMAND:
SEGMENT
NAME/
DESCRIPTOR
BULK BREAKING
SPATIAL
CONVENIENCE
DELIVERY/
WAITING TIME
ASSORTMENT/
VARIETY
CUSTOMER
SERVICE
INFORMATION
PROVISION
1.
2.
3.
4.
5.
INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell, this
should be done. If not, an intuitive ranking can be imposed by noting for each segment whether demand for the
given service output is high, medium, or low.
Producers
Physical
Possession
Ownership
Physical
Possession
Ownership
Physical
Possession
Ownership
Promotion
Promotion
Promotion
Negotiation
Financing
Wholesalers
Negotiation
Financing
Retailers
Negotiation
Financing
Risking
Risking
Risking
Ordering
Ordering
Ordering
Payment
Payment
Payment
Consumers
Industrial
and
Household
Commercial Channel Subsystem
The arrows above show flows of activity in the channel (e.g. physical possession flows from producers to
wholesalers to retailers to consumers). Each flow carries a cost. Some examples of costs of various flows
are given below:
Marketing Flow
Cost Represented
Physical possession
Storage and delivery costs
Ownership
Inventory carrying costs
Promotion
Personal selling, advertising, sales promotion, publicity,
public relations costs, trade show costs
Negotiation
Time and legal costs
Financing
Credit terms, terms and conditions of sale
Risking
Price guarantees, returns allowances, warranties,
insurance, repair, and after-sale service costs
Ordering
Order-processing costs
Payment
Collections, bad debt costs
TABLE 3-1: CDW’S PARTICIPATION IN VARIOUS CHANNEL FLOWS
Channel Flow
CDW’s Investment in Flow
Physical possession
(a) CDW has a 400,000 sq. ft. warehouse.
(b) CDW ships 99 percent of orders the day they are received.
(c) For CDW’s gov’t buyers, CDW has instituted an “asset tagging” system that lets buyer track what product
is going where; product is scanned into both buyer and CDW databases, for later ease in tracking products (e.g.
for service calls)
(d) CDW buys product in large volumes from mfgrs., taking in approximately eight trailer-loads of product
from various suppliers every day. Loads are received in bulk, with few added services.
Promotion
(a) CDW devotes a salesperson to every account (even small, new ones!), so that an end-user can talk to a real
person about technology needs, system configurations, post-sale service, etc.
(b) Salespeople go through 6½ weeks of basic training, then 6 months of on-the-job coaching, then a year of
monthly training sessions.
(c) New hires are assigned to small-business accounts to get more opportunities to close sales.
(d) Salespeople contact clients not through in-person sales calls (too expensive), but through phone/e-mail.
(e) CDW has longer-tenured salespeople than its competitors.
Negotiation
(a) CDW-G started a small-business consortium in 2003 to help small firms compete more effectively for
federal IT contracts. What CDW-G gives the small biz partner: lower prices on computers than they could
otherwise get; business leads; and access to CDW’s help desk and product tools; CDW also handles shipping
and billing, reducing the small biz partner’s channel flow burden. What the small biz partner provides: access
to contracts CDW could not otherwise get.
Financing
(a) CDW collects receivables in just 32 days;
CDW turns its inventories 2x per month;
CDW has no debt.
Risking
(a) “We’re a kind of chief technical officer for many smaller firms”:
(b) In April 2004, CDW was authorized as a Cisco Systems Premier (CSP) partner, in serving the commercial
customer market.
TABLE 3-2: PRODUCT RETURNS: A LARGE-SCALE PROBLEM
Product Returns: A Large-Scale Problem
The value of returned goods is close to $60-100 billion annually in the U.S.
Web returns alone had value between $1.8 and $2.5 billion in 2002
Estimates are that the cost of processing those Web returns is twice as high as the merchandise value
itself!
U.S. companies are estimated to spend $35 billion to more than $40 billion per year on reverse logistics
The average company takes 30-70 days to move a returned product back into the market
The estimated number of packages returned in 2004 is 500 million
Furthermore, returns are very significant in many industries. In a survey of over 300 reverse logistics managers in 1998,
researchers found the following ranges for return percentages:
TABLE 3-3: PRODUCT RETURNS: PERCENTAGE RANGES
Industry
Magazine Publishing
Return % Ranges
50%
Catalog Retailers
18-35%
Book Publishers
20-30%
Greeting Cards
20-30%
CD-ROMs
18-25%
Computer Manufacturers
10-20%
Book Distributors
10-20%
Mass Merchandisers
4-15%
Electronic Distributors
10-12%
Printers
4-8%
Auto Industry (Parts)
4-6%
Consumer Electronics
4-5%
Mail Order Computer Manufacturers
2-5%
Household Chemicals
2-3%
TABLE 3-4: DIFFERENCES BETWEEN FORWARD AND REVERSE LOGISTICS
Factor
Difference Between Forward and Reverse Logistics
Volume forecasting
More difficult for returns than for original sales of new product
Transportation
Forward: ship in bulk (many of one SKU), with economies of scale. Reverse: ship many
disparate SKUs in one pallet, no economies of scale.
Product quality
Forward: uniform product quality. Reverse: variable product quality, requiring costly evaluation
of every returned unit.
Product packaging
Forward: uniform packaging. Reverse: packaging varies with some like-new, some damaged –
no economies of scale in handling.
Ultimate destination
Forward: clear destination – to retailer or industrial distributor. Reverse: many options for
ultimate disposition of product, necessitating separate decisions.
Accounting cost
transparency
Forward: high. Reverse: low, because activities are not consistently tracked on a unified basis.
Poor quality product, ships as spare parts to manufacturer
Return for sale
Manufacturer
Return for credit
Inspect, grade
Manufacturer-run
Return/Sorting
Facility
In
sp
ec
t
Re
pa
ir
,g
ra
de
ab
le
pr
od
uc
Retailer
Return for refund
Ins
pec
t,
gra
de
Third-Party Returns/
Reverse Logistics Firm
Repairable product
t
Repair/
Refurbishment
Facility
Hig
h-q
ua
lity
Consumer
pro
duc
t
Secondary Market,
Broker, Jobber
Charity
Key: solid lines denote product to be salvaged for subsequent revenue.
Dotted lines denote non-revenue-producing product flows.
WEIGHTS FOR FLOWS:
COSTS*
BENEFIT
POTENTIAL
(High,
Medium, or
Low)
FINAL
WEIGHT
*
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
1
2
3
4
(end-user)
TOTAL
PHYSICAL
POSSESSION**
100
OWNERSHIP
100
PROMOTION
100
NEGOTIATION
100
FINANCING
100
RISKING
100
ORDERING
100
PAYMENT
100
TOTAL
100
N/A
100
NORMATIVE
PROFIT
SHARE***
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
100
* Entries in column must add up to 100 points.
** Entries across row (sum of proportional flow performance of channel members 1 through 4) for each
channel member must add up to 100 points.
*** Normative profit share of channel member i is calculated as: (final weight, physical possession)*(channel
member i's proportional flow performance of physical possession) + … + (final weight, payment)*(channel
member i's proportional flow performance of payment). Entries across row (sum of normative profit shares for
channel members 1 through 4) must add up to 100 points.
Consumption
Customer
Retailers
Wholesalers
Manufacturers
Suppliers
Source: Based on the lecture notes of Enver Yücesan at INSEAD.
WEIGHTS FOR FLOWS:
COSTS
BENEFIT
POTENT
IAL
(High,
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
FINAL
WEI
GHT
Mfgr.
Retailer
End-user
TOTAL
Medium,
or Low)
PHYSICAL
POSSESSIO
N
30
High
35
30
30
40
100
OWNERSHIP
12
Medium
15
30
40
30
100
PROMOTION
10
Low
8
20
80
0
100
NEGOTIATION
5
Low/Medium
4
20
60
20
100
FINANCING
25
Medium
29
30
30
40
100
RISKING
5
Low
2
30
50
20
100
ORDERING
6
Low
3
20
60
20
100
PAYMENT
7
Low
4
20
60
20
100
TOTAL
100
N/A
100
N/A
N/A
N/A
N/A
NORMATIVE
PROFIT
SHARE
N/A
N/A
N/A
28%
39%
33%
100
WEIGHTS FOR FLOWS:
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
COSTS
BENEFIT
POTENTIAL
(High, Medium,
or Low)
FINAL
WEIGHT
Mfgr.
Retailer
End-user
TOTAL
PHYSICAL
POSSESSION
30
High
35
2
2
2
100
OWNERSHIP
12
Medium
15
2
2
2
100
PROMOTION
10
Low
8
1
3
0
100
NEGOTIATION
5
Low/Medium
4
1
2
1
100
FINANCING
25
Medium
29
2
2
2
100
RISKING
5
Low
2
2
2
1
100
ORDERING
6
Low
3
1
2
1
100
PAYMENT
7
Low
4
1
2
1
100
TOTAL
100
N/A
100
N/A
N/A
N/A
N/A
NORMATIVE
PROFIT SHARE
N/A
N/A
N/A
?
?
?
100
WEIGHTS FOR FLOWS:
PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:
COSTS
BENEFIT
POTENTIAL
(High, Medium,
or Low)
FINAL
WEIGHT
Mfgr.
Retailer
End-user
TOTAL
PHYSICAL
POSSESSION
30
High
35
33
33
33
100
OWNERSHIP
12
Medium
15
33
33
33
100
PROMOTION
10
Low
8
25
75
0
100
NEGOTIATION
5
Low/Medium
4
25
50
25
100
FINANCING
25
Medium
29
33
33
33
100
RISKING
5
Low
2
40
40
20
100
ORDERING
6
Low
3
25
50
25
100
PAYMENT
7
Low
4
25
50
25
100
TOTAL
100
N/A
100
N/A
N/A
N/A
N/A
NORMATIVE
PROFIT SHARE
N/A
N/A
N/A
32%
38%
29%
100
FIGURE 4- 1: SAMPLE REPRESENTATIONS OF THE COVERAGE/MARKET SHARE
RELATIONSHIP FOR FAST MOVING CONSUMER GOODS
100%
D
C
Brand
Market Share
B
A
“normal”
expectation
100%
Extent of Dis tribution Coverage for a Brand
(% of all Poss ible Outlets )
Function A is an example of the type of relationship that would ordinarily be expected between distribution coverage and market share.
Functions B, C and D are convex and are examples of approximate relationships often found in FMCG markets.
A brand can achieve 100% market share at less than 100% coverage because not every possible outlet will carry the product
category. For example, convenience stores sell food but not every category of food.
Based on Reibstein, David J., and Paul W. Farris (1995), "Market Share and Distribution: A
Generalization, A Speculation, and Some Implications," Marketing Science, 14 (3), G190-G202.
FIGURE 4- 2: : SELECTIVE COVERAGE--THE MANUFACTURER’S
CONSIDERATIONS
For
For the
the Manufacturer
Manufacturer
Limited coverage is currency
More selectivity = more money
Exclusive distribution =
Manufacturers use the money to “pay” the Channel Members for :
- limiting its own coverage of brand in product category
(gaining exclusive dealing is very expensive)
- supporting premium positioning of the brand
- finding a narrow target market
- coordinating more closely with the manufacturer
- making-supplier specific investments
• new products
• new markets
• differentiated marketing strategy requiring downstream implementation
- accepting limited direct selling by manufacturer
- accepting the risk of becoming dependent on a strong brand
Manufacturers need to “pay more” when :
- the product category is important to the Channel Member
- the product category is intensely competitive
FIGURE 4- 3: CATEGORY SELECTIVITY: THE DOWNSTREAM CHANNEL
MEMBERS’ CONSIDERATIONS
For
For the
the Downstream
Downstream Channel
Channel Member
Member
Limiting brand assortment is currency
Fever brand = more money
Exclusive dealing =
Downstream Channel Members use the money to “pay” the supplier for :
- limiting the number of competitors who can carry the brand in the Channel Member’s trading area
- providing desired brands that fit the Channel Member’s strategy
- wording closely to help the Channel Member achieve competitive advantage
- making Channel-Member-specific investments
• new products
• new markets
• differentiated Channel Member strategy requiring supplier cooperation
- accepting the risk of becoming dependent on a strong Channel Member
Downstream Channel Members need to “pay more” when :
- the trading area is important to the supplier
- the trading area is intensely competitive
FIGURE 5-1: THE GAP ANALYSIS FRAMEWORK
SOURCES OF GAPS
Environmental
Bounds:
Local legal
constraints
Local physical,
retailing
infrastructure
Managerial
Bounds:
Constraint due
to lack of
knowledge
Constraint due
to optimization
at a higher level
TYPES OF GAPS
Demand-Side Gaps:
SOS < SOD
SOS > SOD
Which service
outputs?
Supply-Side Gaps:
Flow cost is too
high
Which flow(s)?
CLOSING GAPS
Demand-Side Gaps:
Offer tiered service
levels
Expand/contract
provision of service
outputs
Change segment(s)
targeted
Supply-Side Gaps:
Change flow
responsibilities of
current channel
members
Invest in new low-cost
distribution
technologies
Bring in new channel
members
FIGURE 5-2: ONLINE BILLING AND PAYMENT: GAP ANALYSIS
BOUNDS
GAPS
CLOSING THE GAPS
Environmental:
Technology infrastructure:
takes time to fully develop
initially endowed benefits more on
billers than on payers
is not universally available
is characterized by high fixed set-up
costs, but low marginal implementation
costs and thus is not attractive unless
significant scale is achieved
Demand-side:
Assortment/variety (one-stop bill
payment site not available)
Waiting time too long (some e-bills took
5 days to pay)
Information provision poor (thus e-bill
payment viewed as risky)
Supply-side:
Clear lowering of many channel flow
costs
But consumer (as a channel member)
bears more perceived risk, with no
compensating price cut
Cost cuts initially much more available
to biller than to payer (asymmetric cost
efficiencies that hamper adoption)
Relax environmental bounds:
Build software applications to generate
back-office benefits for B2B players
Presentment technology eventually
developed to improve assortment/variety
for consumer payers
Increase promotional efforts  generate
information for consumers
Add new specialist channel members
New specialists develop new technology
to provide integrated benefits to
consumers and B2B payers
Consumers
adopt
e-bill payment
Banks, billers increase
promo efforts to publicize
e-bill payment; may even
cut cost to consumer
Scale goes up at biller
or bank
Due to economies of scale,
per-transaction cost of
offering e-bill payment falls
Note: the B2B process exhibits a similar path, with the added inducement to payers of
the development of technologies to integrate bill payment information with backoffice (accounts payable, inventory management, and ordering) processes.
Sources of Gaps:
Environmental Bounds:
Managerial Bounds:
Infrastructure for managing returns is not
as well developed as for forward
logistics.
Many manufacturers lack information about scope of problem and how much money
they are losing by not managing it better.

Types of Gaps:
Demand-Side Gaps:
Supply-Side Gaps:
Customer service: end-users may be
dissatisfied when charged a restocking
fee, as many are not widely publicized.
Quick delivery: end-users fail to get their
desired product quickly when they have
to return it for exchange or refund.
Physical possession, ownership, and financing: returned product held in the system
for 30-70 days before returning to the market for resale adds to all of these costs.
Promotion: when returned product is sent to a liquidator, it is likely to end up in a
channel competitive to the new-goods market, creating brand confusion and
promotional inefficiency.
Risking: uncertainty on both the supply (demand forecasting) and demand (what
product is right for me?) sides
Payment: returns trigger multiple new payment flows, to end-user (who returns
product), to retailer (who gets money back from original invoice paid to
manufacturer), and to third-party disposal or logistics firms.

Closing Gaps:
Demand-Side Gaps:
Efforts to minimize returns improve on
quick delivery.
Supply-Side Gaps:
Effective third-party logistics specialists not only handle returned product faster, but
also repackage and re-kit it to sell through non-competing new channels.
5
3,6
1,4
2,7
KEY:
1,4: Lebanon, Indiana
2,7: Marina del Rey, California
3,6: Jamesburg, New Jersey
5: Bridgewater, Massachusetts
TOTAL DISTANCE: 9,600 MILES
TABLE 5-1: U.S. RETAIL MUSIC SALES, 1999-2003
Year
Sales in $billion
1999
$14.6
2000
$14.3
2001
$13.7
2002
$12.8
2003
$11.8
Time Period
Average Price
2002 (Q1)
$13.90
2002 (Q2)
$13.90
2002 (Q3)
$13.60
2002 (Q4)
$13.90
2003 (Q1)
$13.80
2003 (Q2)
$13.70
2003 (Q3)
$13.50
2003 (Q4)
$13.55
2004 (Q1)
$13.25
TABLE 5-3: SHARE OF ALBUMS SOLD BY CHANNEL, 2002
Channel
Share of Albums Sold
Music chain stores
51.0%
Mass merchants
33.8%
Independents
11.9%
Other
3.3%
Notes: 680.9 million albums were sold in total in 2002. Mass merchant
channel includes Best Buy, Kmart, Wal-Mart, Costco, and Target.
COST
PERFORMANCE
LEVEL:
Demand-side
Gap
(SOD>SOS)
No DemandSide Gap
(SOD=SOS)
Demand-side
Gap
(SOS>SOD)
Price/value
Price/value
No Supply-Side proposition=right
proposition=right
No
Gaps
Gap (Efficient
for a less
for a more
Flow Cost)
demanding
demanding
segment!
segment!
Supply-side Gap
Insufficient SO
High cost, but
High costs and
(Inefficiently High provision, at high
SO’s are right:
SO’s=too high:
Flow Cost)
costs: price &/or value is good, but no extra value
cost too high,
price &/or cost is created, but price
value too low
high
&/or cost is high
45
Total Cost as a
Function of
Delivery Time
40
G
35
30
Cost
25
End-User's Cost
of Holding Goods
A
E
20
F
15
B
10
Cost of Moving Goods
to the End-User
5
C
D
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46
Delivery Time
Source: Adapted from Louis P. Bucklin, A Theory of Distribution Channel Structure (Berkeley, CA:
IBER Publications, University of California, 1966), pp. 22-25.
SERVICE OUTPUT LEVEL DEMANDED (SOD) VERSUS SERVICE OUTPUT LEVEL SUPPLIED (SOS)
SEGMENT
NAME/
DESCRIPTO
R
BULK
BREAKING
SPATIAL
CONVENIENC
E
DELIVERY/
WAITING
TIME
ASSORTMEN
T/ VARIETY
CUSTOMER
SERVICE
INFORMATIO
N PROVISION
MAJOR
CHANNEL
FOR THIS
SEGMENT
1.
2.
3.
4.
5.
Notes and directions for using this template:
 Enter names and/or descriptions for each segment.
 Enter whether SOS>SOD, SOS<SOD, or SOS=SOD for each service output and each
segment. Add footnotes to explain entries if necessary. If known and relevant,
footnote can record any supply-side gaps that lead to each demand-side gap.
 Record major channel used by each segment, i.e., how does this segment of buyers
choose to buy?
CHANNEL
[targeting which
segment(s)?]
CHANNEL
MEMBERS AND
FLOWS THEY
PERFORM
ENVIRONMENTAL/
MANAGERIAL
BOUNDS
SUPPLY-SIDE GAPS
[affecting which
flow(s)?]
PLANNED
TECHNIQUES FOR
CLOSING GAPS
DO/DID ACTIONS
CREATE OTHER
GAPS?
1.
2.
3.
4.
5.
Notes:
Record routes to market in the channel system. List should include all channels recorded in Figure 5-4
above. Note the segment or segments targeted through each channel.
Summarize channel members and key flows they perform (ideally, link this to the Efficiency Template
analysis in Chapter 3).
Note any environmental or managerial bounds facing this channel.
Note all supply-side gaps in this channel, by flow or flows affected.
If known, record techniques currently in use or planned for use to close gaps (or note that no action is
planned, and why).
Analyze whether proposed/actual actions have created or will create other gaps.
SERVICE OUTPUT LEVEL DEMANDED (SOD: L/M/H) VERSUS
SERVICE OUTPUT LEVEL SUPPLIED BY CDW (SOS)
SEGMENT
NAME/
DESCRIPTO
R
BULK
BREAKING
SPATIAL
CONVENIENCE
DELIVERY/
WAITING
TIME
ASST/
VARIETY
1. Small
business
buyer
H
(SOS=SOD)
Original
equipment: M
(SOS=SOD)
Post-sale service:
H (SOS=SOD)
Original
equipment: M
(SOS>SOD)
Post-sale service:
H (SOS=SOD)
M (SOS>SOD)
2. Large
business
buyer
L
(SOS>SOD)
Original
equipment: H
(SOS=SOD)
Post-sale service:
L (SOS>SOD)
Original
equipment: M
(SOS>SOD)
Post-sale service:
L (SOS>SOD)
3. Gov’t/
education
L
(SOS>SOD)
Original
equipment: H
(SOS=SOD)
Post-sale service:
H (SOS=SOD)
Original
equipment: M
(SOS>SOD)
Post-sale service:
M (SOS>SOD)
CUSTOMER
SERVICE
INFORMATIO
N PROVISION
MAJOR
CHANNEL
FOR THIS
SEGMENT
H (SOS=SOD)
H (both pre-sale
and post-sale)
(SOS=SOD)
Value-added
reseller like
CDW, or
retailer
M/H
(SOS=SOD)
M (SOS>SOD)
L (SOS>SOD)
Manufacturer
direct, or
large reseller
like CDW
M/H
(SOS=SOD)
H (SOS=SOD)
H (both pre-sale
and post-sale)
(SOS=SOD)
Manufacturer
direct, or
reseller; 23
percent from
small business
(VARs)
CHANNEL
[targeting which
segment(s)?]
CHANNEL
MEMBERS AND
FLOWS THEY
PERFORM*
ENVIRONMENTAL
(E) / MANAGERIAL
(M) BOUNDS
SUPPLY-SIDE GAPS
[affecting which
flow(s)?]
PLANNED
TECHNIQUES FOR
CLOSING GAPS
DO/DID ACTIONS
CREATE OTHER
GAPS?
1. CDW direct to
buyer ( small
business buyer)
Manufacturer;
CDW;
Sm. Bus. Buyer
(M): no screening of
recruits for expected
longevity with firm
Promotion [sales
force
training/turnover]
Better screening of
new recruits
No
Buying from CDW
closes gaps for
customer in Risking
2. CDW direct to
buyer ( large
business buyer,
government)
Manufacturer;
CDW, CDW-G;
Lg. Bus. Buyer or
Government Buyer
(E): government
requires 23 percent of
purchases from small
vendors
(M): no screening of
recruits for expected
longevity with firm
Promotion [sales force
training/turnover]
Negotiation [cannot
close 23% of deals
with government]
Better screening of
new recruits;
Rely on consortium
channel structure
(below)
No
3. CDW + small
business VAR
consortium member
( government)
Manufacturer;
CDW-G;
Small VAR;
consortium partner
Government Buyer
(E): government
requires 23 percent of
purchases from small
vendors;
(M): VAR’s small
business size
(M): no screening of
recruits for expected
longevity with firm
Promotion [sales force
training/turnover];
(Negotiation: only a
gap for a small VAR
not in the CDW
alliance)
Better screening of
new recruits;
Negotiation gap above
is closed through
consortium with small
VARs
No
Note: all channel members perform all flows to some extent. Key channel flows of interest are promotion, negotiation,
FIGURE 6-1 THE NATURE AND SOURCES OF CHANNEL POWER
A’s Level of Investment In :
Reward
Coercion
Legitimacy
Expertise
Reference
UTILITY DERIVED
BY B FROM A
A’s Offering to B:
Reward
Dependence
of B on A
Coercive
Legitimacy
Expertise
Referent
Competitive Levels Of:
Reward
Coercion
Power of
A over B
SCARCITY OF B’s
ALTERNATIVES TO
A
Legitimacy
Expertise
Reference
B’s access to
A’s competitors
FIGURE 6-2 USING POWER TO EXERT INFLUENCE
Power Source(s) Necessary
Influence Strategy
for this to Work
1. Promise
Reward
2. Threat
Coercive
3. Legalistic
Legitimate
4. Request
Referent, Reward, Coercive
5. Info Exchange
Expertise, Reward
6. Recommendation
Expertise, Reward
Supplier
Goals
Financial
Reseller Viewpoint
Viewpoint
Maximize own
profit
- Higher prices
to reseller
- Higher
sales
Maximize own
by
profit
- Higher own
by reseller
(lower prices from our
and higher prices
to our
)
- Higher reseller expenses
- Lower
expenses
- Higher reseller inventory
- Faster inventory
Target
( less
too
high .
: You don’t
Reseller
support)
effort
are
support me
money
.
enough
, we can’t make
.
turnover
stocks)
from manufacturers
on :
- Segment
Accounts
- Multiple
on :
Focus
- Multiple segments
markets
- Many accounts
( raise
put enough
Your prices
- Higher allowances
reseller
Focus
Desired
brand.
With your wholesale prices
(lower reseller
to
behind my
supplier
of Clash
: You don’t
Supplier
by
-level margins
customer
- Lower allowances
Expression
corresponding
Supplier
to resellers’ positioning
more effort. Our
(e.g. discounter)
for us.
- Our
Reseller
markets only
- Selected accounts
volume
and share
)
(those that
strategy
more
: We need
coverage and
reseller doesn’t
: You don’t
respect
. We need
do enough
our marketing
to make money too
.
too many lines
. You
are profitable
to serve)
Desired Product
- Concentrate
And Accounts
product category
Policy
our brand
- Carry
on our
our full
conceivable need
* Based
on Magrath
and
Hardy
scope over product categories
don’t give
line
- Serve
every
brand assortment
, plus
to expand our line
outside our traditional
strenghts
Supplier
disloyal
(a variation for
efforts
and
- Achieve economies of
)
(1989)
our
customers by offering
- Do
not carry
slow-
moving
supplier
(every
these
)
Reseller
: You
carry
us enough
or
By the way
has some
of
, you will benefit
, shouldn’t you consider pruning
your product line
items
You’re
: Our customers come first
satisfy our customers
inferior
attention.
.
?
. If we
.
FIGURE 8-1: SYMPTOMS OF COMMITMENT IN MARKETING CHANNELS
A committed party to a relationship (a manufacturer, a distributor, or another channel member) views its
arrangement as a long-term alliance. Some manifestations of this outlook show up in statements such as
these, made by the committed party about its channel partner.
•
We expect to be doing business with them for a long time.
•
We defend them when others criticize them.
•
We spend enough time with their people to work out problems and misunderstandings.
•
We have a strong sense of loyalty to them.
•
We are willing to grow the relationship.
•
We are patient with their mistakes, even those that cause us trouble.
•
We are willing to make long-term investments in them, and to wait for the payoff to come.
•
We will dedicate whatever people and resources it takes to grow the business we do with them.
•
We are not continually looking for another organization as a business partner to replace or add to this
one.
•
If another organization offered us something better, we would not drop this organization, and we
would hesitate to take on the new organization.
Clearly, this is not normal operating procedure for two organizations. Commitment is more than having an
ongoing cordial relationship. It involves confidence in the future, and a willingness to invest in the partner,
at the expense of other opportunities, in order to maintain and grow the business relationship.
FIGURE 8-2: MOTIVES TO CREATE AND MAINTAIN STRATEGIC ALLIANCES
IN CHANNELS
Motives to Ally Strategically
The Upstream Channel Member
The Downstream Channel Member
Fundamentals
Motivate downstream channel members to
represent them better
In current markets
With current products
In new markets
With new products
Avoid stockouts while keeping costs under
control
Lower costs of all flows performed, such as
lower inventory holding costs
Generate customer preference
Coordinating marketing efforts more tightly with
downstream channel members
Get closer to customers and prospects
Enhance understanding of the market
Coordinating marketing efforts more tightly with
upstream channel members
Serve the customer better
Convert prospects into customers
Net effect: higher volume and margins
Preserving choice and flexibility of channel
partners
Guaranteeing market access in the face of
consolidation in wholesaling
Keep routes to market open
Rebalance power between the producer and
surviving channels
Assure a stable supply of desirable products, even
as manufacturers consolidate
In current markets
Selling current products
Opening to new markets
With new products
Strategic pre-emption
Erecting barriers to entry to other brands
Induce channels to refuse access
Induce channels to offer low levels of support to
entrants
Differentiate themselves from other downstream
channel members
Supplier’s preferred outlet
Value-added services, difficult to copy and of
high value to their customers
Superordinate Goal
Enduring competitive advantage leading to profit
Reduce accounting and opportunity costs
Enduring competitive advantage leading to profit
Reduce accounting and opportunity costs
Supplier’s Guess:
How committed is
this
distributor to me?
Supplier’s
Commitment to a
Distributor
Distributor’s
Commitment to a
Supplier
Distributor’s Guess:
How committed is this
supplier to me?
Relationship Phas e 1:
Awarenes s
Relationship Phase 2:
Exploration
Relationship Phase 3:
Expans ion
Relationship Phase 4:
Commitment
Relationship Phas e 5:
Decline and Diss olution
• One organization sees
another as a feas ible
exchange partner
• Little interaction
• Networks are critical :
one player recommends
another
• Physical proximity
matters: parties more
likely to be aware of each
other
• Experience with
transactions in other
domains (other products,
markets , functions) can be
us ed to identify parties
• Testing, probing by both
s ides
• Inves tigation of each
other’s natures and
motives
• Interdependence grows
• Bargaining is intens ive
• Selective revealing of
information is initiated
and mus t be reciprocated
• Great s ensitivity to
is sues of power and
justice
• Norms begin to emerge
• Role definitions become
more elaborated
• Key feature: each s ide
draws inferences and tests
them
• This phase is eas ily
terminated by either side
• Benefits expand for both
s ides
• Interdependence expands
• Each party inves ts to
build and maintain the
relations hip
• Long time horizon
• Parties may be aware of
alternatives but do not
court them
• High expectations on
both s ides
• High mutual dependence
• High trus t
• Partners resolve conflict
and adapt to each other
and to their changing
environment
• Shared valves and/or
contractual mechanis ms
(s uch as s hared risk)
reinforce mutual
dependence
• Key features: loyalty,
adaptability, continuity,
high mutual dependence
s et these relations hips
apart
• Tends to be s parked by
one s ide
• Mounting
diss atis faction leads one
s ide to hold back
inves tment
• Lack of investment
provokes the other s ide to
reciprocate
• Dis solution may be
abrupt but is us ually
gradual
• Key feature: it takes two
to build but only one to
undermine. Decline often
s ets in without the two
parties’ realization
1
2
3
• Ris k taking increases
• Satis faction with res ults
leads to greater motivation
and deepening
commitment
• Goal congruence
increas es
• Cooperation increases
• Communication
increas es
• Atlernative partners look
less attractive
• Key feature: momentum
mus t be maintained . To
progres s, each party mus t
s eek new areas of activity
and maintain cons istent
efforts to create mutual
payoffs
4
5
FIGURE 9-1: THE CONTINUUM OF DEGREES OF VERTICAL INTEGRATION
Buy
Classical Market
Contracting
Third Party Does it
(for a price)
Their people
Their money
Their risk
Their responsibility
Their operation (control)
Their gain or loss
Make
Quasi-Vertical
Integration
(Relational Governance)
How does the
the work get done
The costs
You and third party
share costs and
benefits
The benefits
Vertical
Integration
You do it
Your people
Your money
Your risk
Your responsibility
Your operation (control)
Your gain or loss
Function
Classical Market
Contracting
1) Selling (only)
Manufacturers’
Representatives
2) Wholesale
Distribution
Independent
Wholesaler
3)
Independent
(3rd party)
Retail
Distribution
Quasi-vertical
Integration
“Captive” or Exclusive
Sales Agency *
Distribution
Joint Venture
Franchise
Store
Vertical
Integration
Producer Sales
Force (direct
sales force)
Distribution
Arm of Producer
Company
Store
* Operationally, a sales agency deriving more than 50% of its revenues from one principal
Highly Volatile Market
Low Specificity
Outsource Distribution
to Retain Flexibility
Until Uncertainty Is
Reduced
High Specificity
Highly Promising
Market
Vertically Integrate
to Gain Control Over
Employees And Avoid
Small-Numbers Bargaining
In Changing Circumstances
Less Promising
Market
Do Not Enter
Step 2:
Question Outsourcing Where Markets Are
Not Competitive:
Step 1:
Outsourcing Distribution to Benefit
from Advantages of Competitive
Markets:
+
Revenues
+
• Motivation
• Specialization
• Survival of the Economic Fittest
• Economies of Scale
• Heavier Coverage
• Independence from a Single Producer
1) Valuable Company-Specific Capabilities
are Needed:
• Know-How
• Relationships
• Brand Equity Created by Distribution
Activities
• Dedicated Capacity
• Site Specificity
• Customized Physical Facilities
2) Thin Supply
-
-
Direct
Costs
Overhead
-
Step 3:
Question Outsourcing Where Indicators of
Results Do Not Correspond to
Performance:
+
• Cannot be benchmarked
• Not Timely
• Inaccurate
FIGURE 10-1: PRINCIPAL U.S. FEDERAL LAWS AFFECTING MARKETING
CHANNEL MANAGEMENT
Act
Key Provisions
Sherman Antitrust Act, 1890
1.Prohibits contracts, combinations, or conspiracies in restraint of interstate or foreign commerce.
Clayton Antitrust Act, 1914
Where competition is, or may be, substantially lessened, it prohibits:
1.Price discrimination in sales or leasing of goods
2.Exclusive dealing
3.Tying contracts
4.Interlocking directorates among competitors
5.Mergers and acquisitions.
Federal Trade Commission (FTC)
Act, 1914
1.Prohibits unfair or deceptive trade practices injurious to competition or a competitor.
2.Sets up FTC to determine unfairness.
Robinson-Patman Act, 1936
1.Discriminatory prices for goods are prohibited if they reduce competition at any point in the channel.
2.Discriminatory prices can be given in good faith to meet competition.
3.Brokerage allowances are allowed only if earned by an independent broker.
4.Sellers must give all services and promotional allowances to all buyers on a proportionately equal basis if the
buyers are in competition. The offering of alternatives may be necessary.
5.Buyers are prohibited from knowingly inducing price or promotional discrimination.
6.Price discrimination can be legal if it results from real cost differences in serving different customers.
FTC Trade Practice Rules
1.Enforced by FTC. Defines unfair competition for individual industries. These practices are prohibited by the
FTC.
2.Defines rules of sound practice. These rules are not enforced by the FTC, but are recommended.
FIGURE 10-2: LEGAL RULES USED IN ANTITRUST ENFORCEMENT
Per se illegality:
The marketing policy is automatically unlawful
regardless of the reasons for the practice and without
extended inquiry into its effects. It is only necessary
for the complainant to prove the occurrence of the
conduct and antitrust injury.
Modified rule of reason:
(also called "Quick Look") The marketing policy is
presumed to be anticompetitive if evidence of the
existence and use of significant market power is found,
subject to rebuttal by the defendant.
Rule of reason:
Before a decision is made about the legality of a
marketing policy, it is necessary to undertake a broad
inquiry into the nature, purpose, and effect of the
policy. This requires an examination of the facts
peculiar to the contested policy, its history, the reasons
why it was implemented, and its competitive
significance.
Per se legality:
The marketing policy is presumed legal.
Retailer (by rank; home
country) (rank in 1998)
Retail Formats
2003 Retail
Sales
(US$ million)
5 Year Retail
Sales Compound
Annual Growth
Rate
1. Wal-Mart Stores, Inc.
(USA) (1)
Discount, Hypermarket, Supermarket,
Superstore, Warehouse
256,329
13.2%
2. Carrefour (France) (8)
Cash & Carry, Convenience, Discount,
Hypermarket, Specialty, Supermarket
79,796
20.8%
64,816
16.5%
60,503
3.1%
53,791
14.4%
51,535
12.5%
46,781
8.9%
44,584
10.7%
41,693
11.8%
40,060e
14.4%
3. Home Depot (USA) (16)
4. Metro (Germany) (2)
5. Kroger (USA) (3)
6. Tesco (UK) (18)
7. Target (USA) (ii)
8. Ahold (Netherlands) (5)
9. Costco (USA) (24)
10. Aldi Einkauf
(Germany) (17)
DIY
Cash & Carry, Department, DIY, Food
Service, Hypermarket, Specialty,
Superstore
Convenience, Discount, Specialty,
Supercenter, Supermarket, Warehouse
Convenience, Department, Hypermarket,
Supermarket, Superstore
Department, Discount, Supercenter
Cash & Carry, Convenience, Discount,
Drug, Hypermarket, Specialty,
Supermarket
Warehouse
Discount, Supermarket
Number of
Countries; On
Which
Continents (i)
10 (N. Am., S.
Am., Asia,
Eur.)
30 (Af., S. Am.,
Asia, Eur.)
4 (N. Am.)
28 (Af., Asia,
Eur.)
1 (N. Am.)
12 (Asia, Eur.)
1 (N. Am.)
21 (N. Am., C.
Am., S. Am.,
Asia, Eur.)
9 (N. Am., S.
Am., Asia,
Eur.)
12 (N. Am.,
Eur., Pac.)
11. Rewe (Germany) (12)
12. Intermarche (France)
(4)
13. Sears (USA) (6)
14. Safeway, Inc. (USA)
(19)
15. Albertson’s (USA) (9)
16. Schwarz Group
(Germany) (36)
Cash & Carry, Discount, DIY, Drug,
Hypermarket, Specialty, Supermarket,
Superstore
Cash & Carry, Convenience, Discount,
DIY, Food Service, Specialty,
Supermarket, Superstore
Department, Mail Order, Specialty
Supermarket
Convenience, Drug, Supermarket
Discount, Hypermarket, Superstore
17. Walgreens (USA) (31)
Drug
18. Auchan (France) (21)
Department, DIY, Hypermarket,
Specialty, Supermarket, Superstore
19. Lowe’s (USA) (40)
DIY
20. Ito-Yokado (Japan)
(23)
Convenience, Department, Food Service,
Specialty, Supermaket, Superstore
Cash & Carry, Discount, DIY, Drug,
Hypermarket, Specialty, Supermarket,
Superstore
Convenience, Drug, Department,
Discount, DIY, Food Service, Specialty,
Supermarket, Superstore
21. Tengelmann (Germany)
(13)
22. AEON (Japan) (n.l.)
38,931e
1.5%
37,472e
204%
36,372
-2.5%
35,553
7.7%
35,436
17.2%
33,435e
22.4%
32,505
16.3%
32,497
1.4%
30,838
20.3%
30,819
4.4%
4 (N. Am.,
Asia)
29,091e
-2.0%
15 (N. Am.,
Asia, Eur.)
28,697
6.9%
11 (N. Am.,
Asia, Eur.)
13 (Eur.)
7 (Eur.)
3 (N. Am.)
3 (N. Am.)
1 (N. Am.)
17 (Eur.)
1 (N. Am.)
12 (Af., S. Am.,
Asia, Eur.)
1 (N. Am.)
23. J. Sainsbury (UK) (20)
24. Edeka (Germany) (11)
Convenience, Hypermarket,
Supermarket, Superstore
Cash & Carry, Convenience, Discount,
DIY, Specialty, Supermarket,
Hypermarket, Superstore
25. E. Leclerc (France) (22) Convenience, Hypermarket, Supermarket
26. CVS (USA) (32)
Drug
27. Casino (France) (33)
Cash & Carry, Convenience,
Department, Discount, Food Service,
Hypermarket, Specialty, Supermarket,
Warehouse
28. Best Buy (USA) (51)
Specialty
29. Kmart (USA) (10)
Discount, Superstore
30. Delhaize Group
(Belgium) (34)
31. Woolworths (Australia)
(48)
Cash & Carry, Convenience, Drug,
Specialty
Convenience, Department, Specialty,
Supermarket
32. J.C. Penney (USA) (15)
Department, Mail Order
33. KarstadtQuelle
(Germany) (47)
34. AutoNation (USA)
(n.l.)
Department, Food Service, Mail Order,
Specialty
35. Publix (USA) (46)
Convenience, Supermarket
Auto
28,630
1.0%
28,330e
-3.1%
27,396e
5.7%
26,588
11.7%
26,018
10.6%
24,547
19.5%
23,253
-7.1%
21,306
7.8%
19,941
10.6%
17,786
-9.7%
16,976
-2.3%
16,867
5.9%
16,848
6.9%
2 (N. Am., Eur.)
5 (Asia, Eur.)
6 (Eur.)
1 (N. Am.)
19 (N. Am., S.
Am., Asia,
Eur.)
2 (N. Am.)
1 (N. Am.)
10 (N. Am.,
Asia, Eur.)
2 (Pac.)
3 (N. Am., S.
Am.)
23 (N. Am.,
Eur.)
1 (N. Am.)
1 (N. Am.)
36. Rite Aid (USA) (44)
37. Coles Myer (Australia)
(43)
38. Gap (USA) (57)
39. Pinault-PrintempsRedoute (France) (52)
40. Federated Department
Stores (USA) (29)
41. Safeway (UK) (45)
42. Daiei (Japan) (25)
43. Kingfisher (UK) (30)
44. El Corte Ingles (Spain)
(70)
45. Marks & Spencer (UK)
(38)
Drug
Convenience, Department, Specialty,
Supermarket
Specialty
Auto, Department, Mail Order, Specialty
Department, Specialty
Convenience, Hypermarket,
Supermarket, Superstore
Department, Discount, Specialty,
Supermarket, Superstore
DIY
Convenience, Department, Hypermarket,
Specialty, Supermarket
Department, Specialty, Supermarket
46. Loblaws (Canada) (63)
Cash & Carry, Convenience,
Hypermarket, Supermarket, Superstore,
Warehouse
47. May Department Stores
(USA) (41)
Department, Specialty
48. TJX Cos. (USA) (68)
Discount
16,600
5.6%
16,045
5.6%
15,854
11.9%
15,739e
10.2%
15,264
-0.7%
e
3.5%
15,129
14,562
-10.3%
14,522
3.5%
13,686
17.1%
13,498
0.2%
13,441
8.5%
13,343
0.4%
13,328
10.9%
1 (N. Am.)
2 (Pac.)
6 (N. Am.,
Asia, Eur.)
46 (Af., N.
Am., S. Am.,
Asia, Eur.)
1 (N. Am.)
1 (Eur.)
3 (N. Am.,
Asia)
11 (Asia, Eur.)
2 (Eur.)
27 (N. Am.,
Asia, Eur.)
1 (N. Am.)
1 (N. Am.)
4 (N. Am., Eur.)
49. McDonald’s (USA)
(n.l.)
Food Service
50. IKEA (Sweden) (75)
Specialty
51. Coop Italia (Italy) (64)
52. Toys “R” Us (USA)
(49)
53. Otto Versand
(Germany) (26)
54. Meijer (USA) (60)
55. Migros Genossenschaft
(Switzerland) (50)
56. Dixons (UK) (98)
57. H.E. Butt (USA) (77)
Discount, DIY, Hypermarket,
Supermarket
Specialty
Cash & Carry, Mail Order, Specialty
Superstore
Convenience, Department, Hypermarket,
Specialty, Supermarket, Superstore
Specialty
Supermarket
58. Coop Norden (Sweden)
(n.l.)
Convenience, Discount, DIY,
Supermarket, Superstore
59. Winn-Dixie (USA) (37)
Supermarket
60. SuperValu (USA) (89)
Discount, Supermarket, Superstore
61. Kohl’s (USA) (n.l.)
Department
12,795
0.6%
12,118
12.5%
11,784e
6.7%
11,566
0.7%
11,419
-10.3%
11,100e
7.9%
10,704
-0.1%
10,702e
15.1%
10,700e
11.4%
10,683
ne
10,633
-5.5%
10,551
15.7%
10,282
22.8%
More than 100
(Af., N. Am., C.
Am., S. Am.,
Asia, Eur., Pac.)
32 (N. Am.,
Asia, Eur., Pac.)
2 (Eur.)
31 (Af., N.
Am., Asia, Eur.,
Pac.)
18 (N. Am.,
Asia, Eur.)
1 (N. Am.)
3 (Eur.)
13 (Eur.)
2 (N. Am.)
3 (Eur.)
2 (N. Am.)
1 (N. Am.)
1 (N. Am.)
62. Louis Delhaize
(France) (n.l.)
63. Uny (Japan) (62)
64. Circuit City (USA) (53)
Cash & Carry, Convenience, Discount,
Hypermarket, Specialty, Supermarket
Convenience, Department, DIY, Drug,
Specialty, Supermarket, Superstore
Specialty
65. Dell (USA) (n.l.)
E-commerce
66. Coop Switzerland
(Switzerland) (61)
Convenience, Department, Drug, DIY,
Food Service, Hypermarket, Mail Order,
Specialty, Supermarket
67. Great Universal Stores,
PLC (GUS) (UK) (73)
68. Staples (USA) (74)
69. Limited Brands (USA)
(55)
70. Millunnium Retailing
Group (Japan) (n.l.)
71. Office Depot (USA)
(58)
72. Takashimaya (Japan)
(56)
73. Yamada Denki (Japan)
(n.l.)
74. Systeme U Centrale
Nationale SA (France) (54)
Department, DIY, Specialty
E-commerce, Mail Order, Specialty
Specialty
Department
E-commerce, Mail Order, Specialty
Department, Specialty
Specialty
Hypermarket, Supermarket, Superstore
10,189e
5.1%
10,141
1.0%
9,745
0.9%
9,700e
n/a
9,454
2.6%
9,447
6.2%
9,440e
5.8%
8,934
-0.9%
8,546
ne
8,397e
-1.4%
8,360
-1.2%
8,330
31.1%
8,264e
-2.7%
8 (S. Am.,
Eur.)
2 (Asia)
1 (N. Am.)
Global (ecommerce)
1 (N. Am.)
26 (Af., N.
Am., Asia, Eur.,
Pac.)
10 (N. Am.,
Eur.)
1 (N. Am.)
1 (Asia)
23 (N. Am., C.
Am., Asia,
Eur.)
6 (N. Am.,
Asia, Eur.)
1 (Asia)
4 (Eur.)
75. Empire/Sobey’s
(Canada) (72)
76. Wm. Morrison (UK)
(n.l.)
77. Seiyu (Japan) (n.l.)
78. Somerfield (UK) (65)
79. Boots (UK) (71)
Convenience, Discount, Drug,
Supermarket, Superstore
Supermarket, Superstore
Department, DIY, Specialty,
Supermarket, Superstore
Convenience, Discount, Supermarket
Drug
80. Lotte (S. Korea) (n.l.)
Convenience, Department, Food Service,
Hypermarket, Supermarket
81. Dillard’s (USA) (59)
Department
82. Mercadona (Spain)
(n.l.)
83. Army & Air Force
(USA) (79)
84. Yum! Brands (USA)
(n.l.)
Specialty, Exchange Services
85. John Lewis (UK) (88)
Department, Hypermarket, Supermarket
86. United Auto Group
(USA) (n.l.)
87. CCA Global (USA)
(n.l.)
88. Mitsukoshi (Japan) (67)
Supermarket
Food Service
Auto
Specialty
Department
8,234
12.1%
8,171
14.3%
7,876
-3.1%
7,742
-5.2%
7,649
-0.5%
7,633
12.7%
7,599
-0.5%
7,592
25.2%
7,585
1.3%
7,441
-1.1%
7,437
5.0%
e
20.8%
7,000e
23.9%
6,943
-3.5%
7,400
1 (N. Am.)
1 (Eur.)
4 (Asia)
1 (Eur.)
8 (N. Am.,
Asia, Eur.)
2 (Asia)
1 (N. Am.)
1 (Eur.)
Global
Global
1 (Eur.)
3 (N. Am., S.
Am., Eur.)
5 (N. Am., Eur.,
Pac.)
10 (N. Am.,
Asia, Eur.)
89. Dollar General (USA)
(n.l.)
Discount
90. Kesko (Finland) (100)
Auto, Department, DIY, Discount, Food
Service, Hypermarket, Supermarket,
Specialty
91. Avon (USA) (n.l.)
92. S. Group (Finland) (84)
93. Metcash (South Africa)
(n.l.)
94. Hutchison
Whampoa/AS Watson
(Hong Kong SAR) (n.l.)
95. GJ’s Wholesale Club
(USA) (n.l.)
96. Nordstrom (USA) (90)
97. Schlecker (Germany)
(96)
98. Galeries Lafayette
(France) (83)
Direct Selling Cosmetics
Auto, Convenience, Department,
Discount, Food Service, Hypermarket,
Specialty, Supermarket
Cash & Carry, Convenience, Specialty,
Supermarket
Drug, Specialty, Supermarket
Warehouse
Department, Specialty
Drug, DIY, Hypermarket
Department, Hypermarket
99. CompUSA (USA) (82)
Specialty
100. KESA Electricals
(UK) (n.l.)
Specialty
6,872
16.4%
6,812
10.7%
6,805
5.5%
6,728
10.1%
6,698e
10.4%
6,631e
31.9%
6,585
13.6%
6,492
5.2%
e
6.6%
6,453
6,261
3.7%
4,700e
-2.3%
6,233
ne
1 (N. Am.)
5 (Eur.)
Global
3 (Eur.)
14 (Af., Asia,
Pac.)
15 (Asia, Eur.)
1 (N. Am.)
5 (N. Am., Eur.)
8 (Eur.)
1 (Eur.)
1 (N. Am.)
6 (Eur.)
Notes:
Source: “2005 Global Powers of Retailing,” Stores, January 2005, available on http://www.stores.org .
(i) Continents are abbreviated as follows: Af. = Africa; N. Am. = North America; C. Am. = Central America;
S. Am. = South America; Asia = Asia; Eur. = Europe; Pac. = Pacific (Australia, New Zealand).
(ii) Target was part of Dayton-Hudson Corporation in 1998. Dayton-Hudson itself was ranked 14th in
1998 sales, and if Target’s 1998 sales are taken alone, it would have ranked 25th in sales in 1998 among
global retailers. “n.l.” = not listed in top 100 retailers in 1998.
FLOOR
MAIN FLOOR (39% of total profit)
SECOND FLOOR (12% of total profit)
THIRD FLOOR (6% of total profit)
FOURTH FLOOR (9% of total profit)
FIFTH FLOOR (7% of total profit)
SIXTH FLOOR (10% of total profit)
SEVENTH FLOOR (9% of total profit)
EIGHTH FLOOR (5.5% of total profit)
NINTH FLOOR (2.5% of total profit)
DEPARTMENT
Cosmetics
Accessories (belts, handbags, sunglasses)
Costume jewelry
Fine jewelry
Hosiery
Men's shirts, ties, accessories
Penhaligon's (British shop)
Designer sportswear
Men's sportswear
High-end designer collections
Furs
Bridal boutique
Career wear
Designer shoes
Women's contemporary designers
Shoes
Men's suits
Men's designer clothing
Women's coats
Women's petite sizes
Women's dresses
Lingerie
Children's clothes
Restaurant & candy shop
Salon Z (large sizes)
Beauty salon
PERCENT OF TOTAL STORE PROFIT
GENERATED BY THIS DEPARTMENT
18%
10%
3%
4%
0.5%
3%
0.5%
8%
4%
4.5%
1%
0.5%
8%
1%
6%
1%
8%
2%
3%
4%
2%
3%
2%
0.5%
2%
0.5%
Source: adapted from Jennifer Steinhauer (1997), "The Money Department," The New York Times, Magazine Section 6, April 6, pp. 62
Author: Sue Grafton, a popular mystery writer; book titles each start with a letter of the alphabet, beginning
with “A is for Alibi,” published in 1982. “R is for Ricochet” was published in 2004.
Some of the Sue Grafton books available at www.bookbaron.com on July 5, 2005:
Title
E is for Evidence
Pub. date
1988
Price
$125.00
H is for
Homicide
F is for Fugitive
1991
$50.00
1989
$35.00
I is for Innocent
1992
$35.00
M is for Malice
N is for Noose
P is for Peril
I is for Innocent
M is for Malice
1996
1998
2001
1992
1996
$30.00
$30.00
$30.00
$25.00
$15.00
Condition
1st edition; near fine in near fine dust
jacket (DJ). Light browning to edges of
DJ.
1st edition; near fine in DJ. Signed by
author, review copy.
1st edition; fine in near fine DJ; slight
yellowing along edge of flaps.
1st edition; near fine in DJ. Inscribed by
the author. Light shelfwear, spine lean.
1st edition; fine in DJ. Signed.
1st edition; fine in DJ. Signed.
1st edition; fine in DJ. Signed by author.
1st edition; fine in DJ.
1st edition; near fine in DJ. Light
shelfwear.
Net Sales
($million)
General
Merchandise,
Hypermarkets,
Category Killers:
Wal-Mart
Home Depot
Costco
Target
Lowe’s
Office Supplies,
Drugs:
Walgreen
Best Buy
Office Depot
Circuit City
Department
Stores:
J.C. Penney
May
Kohl’s
Dillard’s
Nordstrom
Specialty Stores:
Gap
Limited
Ann Taylor
Chico’s
SG&A Expenses
($million)
SG&A as % of
Net Sales
285,222
73,094
47,146
45,682
36,464
51,105
16,504
4,598
9,797
7,562
17.9%
22.6%
9.7%
21.4%
20.7%
37,508
27,433
13,565
10,018
8,072
5,053
3,703
2,308
21.5%
18.4%
27.3%
23.0%
18,424
14,441
11,701
7,529
7,131
5,827
3,021
2,540
2,099
2,020
31.6%
20.9%
21.7%
27.9%
28.3%
16,267
9,408
1,854
1,067
4,296
1,872
843
398
26.4%
19.9%
45.5%
37.3%
Source: annual reports for 2004/2005 for each company. Depending on the company’s fiscal year end, 2004 or 2005 figures are used. The
actual fiscal years overlap in all cases.
RETAILER
TYPE
Department store
(e.g., May Co.)
Specialty store
(e.g., Gap)
Mail Order/
Catalog (e.g.,
Lands' End)
Convenience
store (e.g., 7Eleven)
Category killer
(e.g., Best Buy)
Mass
Merchandiser
(e.g., Wal-Mart)
Hypermarket
(e.g., Carrefour)
Warehouse Club
(e.g., Sam's
Club)
MAIN FOCUS
ON MARGIN
OR
TURNOVER?
Margin
BULKBREAKING
SPATIAL
CONVENIENCE
WAITING &
DELIVERY
TIME
VARIETY
(BREADTH)
ASSORTMENT
(DEPTH)
Yes
Moderate
Low wait time
Broad
Margin
Yes
Moderate
Low wait time
Narrow
Moderate/
Shallow
Deep
Margin
Yes
Extremely High
Moderate/ High
wait time
Narrow
Moderate
Both
Yes
Very High
Low wait time
Broad
Shallow
Turnover
Yes
Moderate
Low wait time
Narrow
Deep
Turnover
Yes
Low
Broad
Shallow
Turnover
Yes
Low
Broad
Moderate
Turnover
No
Low
Moderate wait
time (may be out
of stock)
Moderate wait
time
Moderate/high
wait time (may
be out of stock)
Broad
Shallow
FIGURE 11-1: U.S. E-COMMERCE SALES, IN $ MILLION AND AS A PERCENTAGE
OF TOTAL U.S. RETAIL SALES
Source: U.S. Census Bureau, Released May 20, 2005, available at http://www.census.gov/mrts/www.ecomm.htm
U.S. E-commerce sales
25,000
2.5
20,000
2
As % of total U.S. sales
1.5
10,000
1
Percent
$Million
15,000
E-commerce sales ($million)
5,000
0.5
0
0
1Q05
4Q04
E-commerce as % of total US retail sales
3Q04
E-commerce retail sales ($m)
2Q04
1Q04
4Q03
3Q03
2Q03
1Q03
4Q02
3Q02
2Q02
1Q02
4Q01
3Q01
2Q01
1Q01
4Q00
3Q00
2Q00
1Q00
4Q99
Quarter/Year
FIGURE 11-2: PERCENTAGE CHANGE FROM ONE YEAR AGO,
IN TOTAL U.S. RETAIL SALES AND U.S. E-COMMERCE SALES
Source: U.S. Census Bureau, Released May 20, 2005, available at
http://www.census.gov/mrts/www.ecomm.html
% Change from 1 Year Ago: Total U.S. Retail Sales and E-Commerce Sales
80
70
60
Percent
50
40
30
20
10
0
1Q
05
$ Change from 1 Year Ago: E-Commerce Sales
04
04
04
04
03
03
03
03
02
02
02
02
01
01
01
01
00
00
00
00
99
% Change from 1 Year Ago: Total U.S. Retail Sales
4Q
3Q
2Q
1Q
4Q
3Q
2Q
1Q
4Q
3Q
2Q
1Q
4Q
3Q
2Q
1Q
4Q
3Q
2Q
1Q
4Q
Quarter/Year
FIGURE 11-3: PERCENTAGE DISTRIBUTION OF E-COMMERCE SALES BY
MERCHANDISE LINE, 2003
(for U.S. Electronic Shopping and Mail-Order Houses)
% Distribution of E-Commerce Sales by Merchandise Line, 2003, for U.S. Electronic Shopping
and Mail-Order Houses (NAICS 454110), Excluding Nonmerchandise Receipts
Total E-Commerce Sales: $37.75 billion; Total Sales: $125.385 billion
Other merchandise
13%
Toys/hobbies/games
4%
Books/magazines
6%
Clothing
15%
Sporting goods
3%
Office equipment/supplies
9%
Computer hardware
18%
Music/videos
5%
Furniture
9%
Food/beer/wine
2%
Electronics/appliances
8%
Computer software
3%
Drugs, health/beauty aids
5%
E-Commerce as % of Sales for U.S. Electronic Shopping and Mail-Order Houses (NAICS
454110), 2003
Other merchandise
Toys/hobbies/games
Sporting goods
Office equipment/supplies
Music/videos
Furniture
Food/beer/wine
Electronics/appliances
Drugs, health/beauty aids
Computer software
Computer hardware
Clothing
Books/magazines
0.00
10.00
20.00
30.00
Percent
40.00
50.00
60.00
Country
Year
Retail Sales
(in U.S. $)
Number of
Salespeople
Average Sales
Per
Salesperson
Per Capital
Income
(1998)
1. United States
2003
$29.5 billion
13,300,000
$2,218
$441,400
2. Japan
2003
$27.0 billion
2,000,000
$13,500
$37,180
3. Brazil
2004
$3.92 billion
1,538,945
$2,547
$3,090
4. United Kingdom
2004
$3.03 billion
520,000
$5,827
$33,940
5. Italy
2004
$2.98 billion
272,000
$10,956
$26,120
6. Mexico
2003
$2.89 billion
1,850,000
$1,562
$6,770
7. Germany
2004
$2.88 billion
206,346
$13,957
$30,120
8. Korea
2003
$2.73 billion
3,208,000
$851
$13,980
9. France
2004
$1.72 billion
170,000
$10,117
$30,090
10. Taiwan
2003
$1.56 billion
3,818,000
$409
$25,300*
11. Malaysia
2003
$1.26 billion
4,000,000
$315
$4,650
12. Australia
2004
$1.07 billion
690,000
$1,550
$26,900
13. Canada
2004
$1 billion
898,120
$1,113
$28,390
13. Russia
2004
$1 billion
2,305,318
$434
$3,410
15. Thailand
2004
$880 million
4,100,000
$215
$2,540
16. Venezuela
2000
$681 million
502,000
$1,357
$4,020
17. Argentina
2004
$662 million
683,214
$969
$3,720
18. Poland
2004
$644 million
585,200
$1,100
$6,090
19. Colombia
2004
$583 million
650,000
$897
$2,000
20. Turkey
2004
$539 million
571,799
$943
$3,750
21. India
2004
$533 million
1,300,000
$410
$620
22. Indonesia
2002
$522 million
4,765,353
$110
$1,140
23. Spain
2002
$497 million
132,000
$3,765
$21,210
24. Switzerland
2003
$355 million
6,885
$51,561
$48,230
25. Chile
2004
$338 million
223,000
$1,516
$4,910
Top 10 Direct Selling Countries by Ratio of (Average Sales/Salesperson) to (Per Capita Income)
Country
1. Switzerland
2. Brazil
3. India
4. Germany
5. Colombia
6. Italy
7. Japan
8. France
9. Venezuela
10. Chile
Ratio of (Ave. Sales per Salesperson) to (Per
Capita Income)
1.07
.82
.66
.46
.45
.42
.36
.34
.34
.31
Note: the top table lists the top 20 countries by level of direct sales. The second table lists the top 10
countries ranked by the ratio of sales per direct selling salesperson to per capita income (a value of .66, for
example, means that the average direct salesperson makes 66 percent of the average per capita income in that
country).
Source: Adapted from World Federation of Direct Selling Associations website, http://www.wfdsa.org/,
December 1999. Average sales per salesperson are calculated. Per capita income is from the World Development
Indicators database of the World Bank, available at http://www.worldbank.org/ .
*Taiwan per capita income is reported as gross domestic product (GDP) per capita, purchasing power
parity (PPP), for 1998, in The World Factbook 1999, published by the U.S. Central Intelligence Agency, available
at: http://www.odci.gov/cia/publications/factbook/index.html .
Source: Anne T. Coughlan and Kent Grayson (1998), "Network marketing organizations: Compensation
plans, retail network growth, and profitability," International Journal of Research in Marketing, Vol. 15, p. 403.
COMMISSION SCHEDULE:
Volume
Commission Rate
$0-$99
3%
$100-$275
5%
> $275
7%
Janet
(personal
volume=$2
00)
Susan
(personal
volume=$1
00)
Anne
(personal
volume=$5
0)
Catherine
(personal
volume=$1
00)
Lysa
(personal
volume=$5
0)
Kent
(personal
volume=$1
00)
Paulette
(personal
volume=$5
0)
1.
2.
3.
4.
5.
Off invoice. The purpose of an off-invoice promotion is to discount the product to the
dealer for a fixed period of time. It consists of a temporary price cut, and when the time
period elapses, the price goes back to its normal level. The specific terms of the discount
usually require performance, and the discount lasts for a specified period (e.g., 1 month).
Sometimes the trade can buy multiple times and sometimes only once.
Bill-back. Bill-backs are similar to off-invoice except that the retailer computes the
discount per unit for all units bought during the promotional period and then bills the
manufacturer for the units sold and any other promotional allowances that are owed after
the promotional period is complete. The advantage from the manufacturer's position is
the control it gives and guarantees that the retailer performs as the contract indicates
before payment is issued. Generally, retailers do not like bill-backs because of the time
and effort required.
Free goods. Usually free goods take the form of extra cases at the same price. For
example, buy 3 get 1 free is a free-goods offer.
Cooperative advertising allowances. Paying for part of the dealers' advertising is called
cooperative advertising, which is often abbreviated as co-op advertising. The
manufacturer either offers the dealer a fixed dollar amount per unit sold or offers to pay a
percentage of the advertising costs. The percentage varies depending on the type of
advertising run. If the dealer is prominent in the advertisement, then the manufacturer
often pays less, but if the manufacturer is prominent, then he pays more.
Display allowances. A display allowance is similar to cooperative advertising allowances.
The manufacturer wants the retailer to display a given item when a price promotion is
being run. To induce the retailer to do this and to help defray the costs, a display
allowance is offered. Display allowances are usually a fixed amount per case, such as 50
cents per case.
FIGURE 11-6: DESCRIPTION OF TRADE DEALS FOR CONSUMER
NONDURABLE GOODS (CONTINUED)
6.
Sales drives. For manufacturers selling through brokers or wholesalers, it is necessary to offer
7.
Terms or inventory financing. The manufacturer may not require payment for 90 days, thus increasing
8.
Count-recount. Rather than paying retailers on the number of units ordered, the manufacturer does it
9.
Slotting allowances. Manufacturers have been paying retailers funds known as slotting allowances to
10.
Street money. Manufacturers have begun to pay retailers lump sums to run promotions. The lump sum,
incentives. Sales drives are intended to offer the brokers and wholesalers incentives to push the trade
deal to the retailer. For every unit sold during the promotional period, the broker and wholesaler receive
a percentage or fixed payment per case sold to the retailer. It works as an additional commission for an
independent sales organization or additional margin for a wholesaler.
the profitability to the retailer who does not need to borrow to finance inventories.
on the number of units sold. This is accomplished by determining the number of units on hand at the
beginning of the promotional period (count) and then determining the number of units on hand at the
end of the period (recount). Then, by tracking orders, the manufacturers know the quantity sold during
the promotional period. (This differs from a bill-back because the manufacturer verifies the actual sales
in count-recount.)
receive space for new products. When a new product is introduced the manufacturer pays the retailer X
dollars for a "slot" for the new product. Slotting allowances offer a fixed payment to the retailer for
accepting and testing a new product.
not per case sold, is based on the amount of support (feature advertising, price reduction, and display
space) offered by the retailer. The name comes from the manufacturer's need to offer independent
retailers a fixed fund to promote the product because the trade deal goes to the wholesaler.
Source: Robert C. Blattberg and Scott A. Neslin (1990), Sales Promotion: Concepts, Methods, and Strategies
(Englewood Cliffs, NJ: Prentice-Hall), pp. 318-319.
OBJECTIVES:*
TACTICS
1
2
3
4
5
Off invoice
x
x
x
x
x
Bill-back
x
x
x
x
x
Free goods
x
Cooperative advertising
x
x
Display allowances
x
x
Sales drives
x
Slotting allowances
Street money
x
x
x
x
x
6
x
x
*Objectives: Retailer merchandising activities, Loading the retailer, Gaining or maintaining distribution, Obtain price
reduction, Competitive tool, Retailer "goodwill."
Source: Robert C. Blattberg and Scott A. Neslin (1990), Sales Promotion: Concepts, Methods, and Strategies (Englewood
Cliffs, NJ: Prentice-Hall), p. 321.
TABLE 12-1: SOME SOURCES OF INFORMATION ABOUT
THE WHOLESALING SECTOR
Internet Resources
General Industry
Information
There are many sources of information about
wholesale distribution on the Internet.
The National Association of WholesalerDistributors operates two web sites:
- www.NAW pubs.org – On-line bookstore of
NAW reports
- www.NAW meetings.org – Upcoming
NAW-sponsored events
http://www.PembrokeConsulting.com / (A
source of forecasts, data, and analyses
exclusively on wholesale distribution)
TABLE 12-2: PRINCIPAL SERVICES PROVIDED BY MAJOR HARDWARE WHOLESALERSPONSORED VOLUNTARY GROUPS AND WHOLESALER BUYING GROUPS IN THE U.S.
Store
Identification
Merchandising
Aid
Co-op
Advertising
Programs
Accounting
Services
Telephone
Odering
Basic Stock
Lists
Advertising
Planning, Aid
Management
Consultation
Services
Microfiche or
computerized
records of prices
& compatible
parts numbers
Direct-drop
Ship Programs
Preprinted
Order Forms
Employee
Training
Financing
Store
Planning,
Layout
Insurance
Programs
Catalog
Service
Pool
Orders
DataProcessing
Programs
Dealer
Meetings
Field
Supervisor/
Salespeople
Private-label
Merchandise
Consumer
Advertising
Inventory
Control
Systems
Volume
Rebates/
Dividends
Dealer
Shows
Multiple Manufacturers
Multiple Manufacturers
Master
MasterDistributor
Distributor
Wholesalers
Wholesalers
1,250
1,250
(4,000
(4,000branches)
branches)
Electrical
ElectricalContractors
Contractors
Based on Narayandas, Das and V. Kasturi Rangan (2004), "Building and Sustaining
Buyer-Seller Relationships in Mature Industrial Markets," Journal of Marketing, 68 (3),
63-77.
TABLE 13-1: SECTORS WITH SUBSTANTIAL FRANCHISE PRESENCE,
U.S. AND FRANCE
Amusement[i]
Automobiles:
Rental
Service
Equipment
Business Services
Building Products and Services
Children’s Products, Including Clothing
Cleaning Services and Equipment
Educational Services
Employment Agencies
Health and Beauty (Includes Hair Styling
and Cosmetology)
Home Furnishings/Equipment
Lodging/Hotels
Maintenance
Miscellaneous Retail
Miscellaneous Services, including Training
Personal Services and Equipment
Pet Services
Photography and Video
Printing
Quick Services
Real Estate
Restaurants
Fast Food
Traditional
Retail Food
Shipping and Packing
Travel
[i] Categorization adapted from Shane and Foo (1999), already cited, and the French Federation of Franchising
website: www.franchise-fff.com
TABLE 13-2: THE FRANCHISE CONTRACT
The International Franchise Guide of the International Herald Tribune suggests
that any franchise contract should address these subjects.
Definition of terms
Organizational structure
Term of initial agreement
Term of renewal
Causes for termination or non-renewal
Territorial exclusivity
Intellectual property protection
Assignment of responsibilities
Ability to sub-franchise
Mutual agreement of pro forma cash flows
Development schedule and associated penalties
Fees: front end, ongoing
Currency and remittance restrictions
Remedies in case of disagreement[i]
[i] Moulton, Susan L.(ed.) (1996), International Franchise Guide, Oakland, California: Source Books Publications.
Consider the scenario of a well-established franchisor that has built a network of
franchisees. In theory, such a franchisor should be quick to punish transgressions, such
as




sourcing from a supplier of one’s one choice, rather than suppliers approved by the
franchisor
failing to maintain the look and ambiance of the premises
violating the franchisor’s standards and procedures
failing to pay advertising fees--or even the franchisor’s royalty!
Such violations happen surprisingly often. When do franchisors exercise their legitimate
right to enforce their contracts by punishing the franchisee? Research indicates[i]
franchisors weigh the costs and benefits, taking into account the system-investments
they need to protect, their own power, and the countervailing power of the franchisee
and the franchise network. In particular, in their actions, franchisors appear to consider
what signals they are sending to franchisees, both current and potential, by what they
tolerate and what they enforce. With this in mind, franchisors pick their battles, rather
than enforcing their contracts every time they are violated.
When it is particularly costly to enforce, franchisors are more likely to overlook a
violation. This is more likely in the following circumstances.
The franchisees have a very dense, tightly knit network among themselves. Hence,
the franchisor fears a reaction of solidarity, with other franchisees siding with the
violator.
[i] Antia, Kersi D. and Gary L. Frazier (2001), "The Severity of Contract Enforcement in Interfirm Channel Relationships," Journal of
Marketing, 65 (4), 67-81.
TABLE 13-3: WHEN DO FRANCHISORS ENFORCE THE FRANCHISE
CONTRACT? (CONTINUED)

The violator is a central player in the franchisee’s network—with one exception, to be
presented below.

The franchisor suffers from performance ambiguity, meaning its information systems are not
sensitive enough to be sure what is the situation. Such a franchisor cannot monitor well, and
therefore cannot be sure its case against the “violator” is strong.

The franchisor has built strong relational governance, in which the system operates on norms
of solidarity, flexibility, and exchange of information. Such a franchisor doesn’t want to risk
ruining these norms—and has other ways to deal with the violation in any case.

These are the costs of enforcing the contract. But there are circumstances under which the
benefits of enforcement outweigh these costs. The franchisor is more likely to take punitive
action to enforce its contract when:
The violation is a critical one, such as missing a large royalty payment or operating a very
shabby facility in a highly visible location.

 This is particularly the case when the franchisee is a central player in the network.
Ordinarily, central players are protected (as noted above), as the franchisor fears a system
backlash. But when a central player violates the contract in a critical way, franchisors
choose to enforce because it sends a strong signal that the rules are the rules. Put
another way, tolerating a major violation by a central player would signal other
franchisees that the contract is just a piece of paper with no real weight.
TABLE 13-3: WHEN DO FRANCHISORS ENFORCE THE FRANCHISE
CONTRACT? (CONTINUED)


When the violator is a master franchisee, that is, with multiple units. Here, the
risk is that the violation propagates across this franchisee’s units and become a
large-scale problem if the franchisor does not enforce.
The franchisor has invested a great deal in the franchise system (as opposed to
this particular franchisee). The franchisor needs to protect its investment and
the capabilities it has created while building the system. This is true even when
the franchisor does enjoy strong relational governance. The franchisor will risk
upsetting a given relationship to protect its system investments.

When the franchisor is large

When there is high mutual dependence in the franchisee-franchisor relationship
(so that it can withstand the conflict that enforcement will create)

Or when the franchisor is much more powerful than the franchisee (so that the
franchisor can coerce the franchisee to tolerate enforcement).

Taken together, it is clear that the franchisor weighs the power of both sides and
the impact of each act of enforcement on its entire franchise system.
Franchisees thus have more power than would appear to be the case if one
examines each dyad (franchisor/franchisee) in isolation.
FIGURE 13-1: TYPICAL SALES-TO-PROFIT RELATIONSHIPS FOR
FRANCHISORS AND FRANCHISEES
Adapted from Carmen and Klein (1986)
Profits
Franchisor
Franchisee
B*
S*
Sales
FIGURE 14- 1: TYPES OF GOODS FOR SUPPLY CHAIN MANAGEMENT
Adapted from Fisher
(1997)
FIGURE 14-2: TWO KINDS OF SUPPLY CHAINS
Adapted from Fisher (1997)
Physically Efficient
Supply Chain
(Functional Goods )
_______________
Cut costs of
manufacturing ,
holding inventory ,
transportation
Market-Responsive
Supply Chain
(Innovative Goods )
________________
Respond quickly as
demand materializes
Consequences of
Failure
Low prices and
higher costs
create margin
squeeze
Stockouts of high -margin
goods
Heavy markdowns of
unwanted goods
Manufacturing goods
Run at high
capacity utilization
rate
Be ready to alter production
(quantity and type) swiftly
Keep excess production capacity
Inventory
Minimize
everywhere
Keep buffer stocks of parts
and finished goods
Lead times
Can be long,
as demand is predictable
Must be short
Suppliers should be
Low cost
Adequate quality
Fast, flexible
Adequate quality
Product design
Design for ease of
manufacture and to
meet performance
standards
Design in modules
to delay final production
Objective