Chapter 6
Designing the Marketing Channel**
Major Topics for Ch. 6
1.
2.
3.
4.
5.
Channel Design Paradigm (7 steps)**
Channel Goals**
Properties of Channel Tasks (Functions)**
Three Dimensions of Channel Structure**
Two Main Approaches for Choosing a
Channel Structure**
6. Three Analysis Steps to Consider for
Selecting the Best Channel**
6
Topic 1:
6
Channel Design
Channel Design:
Decisions involving the development of
new marketing channels either where
none had previously existed or to the
modification of existing channels
Channel Design
Key points of the definition include:
1. A decision made by the marketer
2. The creation or modification of channels
3. The active allocation of distribution
tasks in an attempt to develop an
efficient structure*
4. The selection of channel members*
5. A strategic tool for gaining a differential
advantage
6
6
Who Engages in Channel Design?*
Firms
(Manufacturers)
• Producers,
manufacturers, service
providers, franchisors
• Look down the
channel
toward the market
Wholesalers
• Look both up and
down
the channel
* Who is missing here?
Retailers
• Look up the
channel
to secure
suppliers
Channel Design Paradigm**
(Seven Step Process)
6
1. Recognize the need for
channel design decision
7. Select
channel members
6. Choose the “best”
channel structure
5. Evaluate
relevant variables
2. Set & coordinate
distribution objectives
3. Specify
distribution tasks
4. Develop alternative
channel structures*
Topic 2
6
Distribution Objectives (Goals)
Setting distribution objectives requires
knowledge of which objectives & strategies
may impinge on these distribution objectives.
Three Key Channel Goals*
• Efficiency: “no better alternative is available that
is universally preferred”
• Control vs. Flexibility
Internal Cohesiveness vs. External Adaptiveness
• Learning and Knowledge
* Intermediate Goals
Topic 3
6
Distribution Channel Tasks (Functions)
Outlining distribution tasks is specific
and situationally dependent on the firm.
For example: Distribution tasks for a
manufacturer of consumer products
differs from those for industrial products.
=
Distribution tasks are a function of the
distribution objectives and the types of
firms involved.
Channel Tasks (Functions)*
• This is a generic list of functions!
• Major Channels Functions (Tasks)
• Physical Possession
• Ownership
• Promotion
• Negotiation & Pricing
• Financing
• Risking
• Order Processing
• Payment Collection
Properties of Channel Tasks (Functions)**
•
Usually performed better through specialization
• Can be shifted among channel members
• Invariably use someone’s resources*
• Key Question: Who can do the best job?
 Matching! (functions with channel members)
Costs Associated with channel functions
•
•
•
•
•
•
•
•
Physical Possession: Storage and delivery cost
Ownership: inventory carrying cost
Promotion: personal selling, advertising, sales promo, PR
Negotiation: time and legal cost
Financing: credit terms, terms and conditions of sale
Risk Taking: warranty, insurance, repair
Ordering: order-processing cost
Payment: collection, bad debt cost
Allocating Five Marketing Functions in an
Automobile Channel*
Exhibit 3.1
Physical
Function
Suppliers
Transporters
Warehouses
Manufacture
r
Title Function
Suppliers
Manufacturer
Payment
Function
Suppliers
Transporter
s
Warehouse
s
Banks
Manufacture
r
Dealers
Transporters
Dealers
Banks
Dealer
s
Custome
r
Banks
Information Function
Suppliers
Promotion
Function
Suppliers
Transporter
s
Warehouse
s Banks
Advertising
Agency
Manufacture
r
Manufacture
r
©McGraw-Hill Companies, Inc. 2002
Transporter
s
Warehouse
s Banks
Advertising
Agency
Dealer
s
Dealer
s
Custome
r
Transporter
s Banks
Custome
r
Customer
Custome
r
13
Role Classifications for Different Types
of Wholesalers
Wholesaler
Classification
Take
Physical
Possession
Merchant Wholesaler
Yes
Manufacturer’s Sales
Organization
No
Agents/Brokers
No
Commission Merchants Yes
Take Negotiation
Title to
Function
Goods Performed
Yes
Yes
Yes
Yes
Promotional
Function
Performed
Yes
Yes
No
Yes
Yes
No
Yes
Yes
Exhibit 2.3
Topic 4
6
Three Dimensions of Channel Structure*
1. Number of
levels in the channel
2. Intensity at the
various levels
Allocation Alternatives
3. Types of
intermediaries
at each level
The Elements of Channel Design**
• Three Dimensions of Design Variation:
– Number of levels in the channel.  Channel
Level Issue
– Number of intermediaries at each level. 
Channel Intensity Issue
– Types of intermediaries used at each level.
 Channel Ownership and Function issue
©McGraw-Hill Companies, Inc. 2002
16
1. Number of Channel Levels
• Range from zero to five or more
• Number of alternatives is limited
• Limitations result from the following factors:
– Particular industry practices
– Nature & size of the market
– Availability of intermediaries
6
Consumer Channel Design
Number of Levels
Zero-level
Retailer
One-level
Producer
Two-level
Wholesaler
Retailer
Three-level
Wholesaler Agent
Retailer
Consumer
Exhibit 3.2
©McGraw-Hill Companies, Inc. 2002
18
Industrial Channel Design
Number of Levels
Zero-level
Industrial
One-level
Manufacturer
Two-level
Three-level
Distributor
Manufacturer’s
Representative
Industrial
User
Manufacturer’s
Salesforce
Exhibit 3.2
©McGraw-Hill Companies, Inc. 2002
19
2. Intensity at the Various Channel Levels
6
Relationship between the intensity of distribution
dimension & number of retail intermediaries used in a
given market area
Intensity Dimension
Intensive
Selective
Exclusive
Numbers of Intermediaries (retail level)
Many
Few
One
6
3. Types of Channel Intermediaries
• Numerous types*
• Manager’s emphasis on types of distribution
tasks performed by these intermediaries
• Watch emerging types
– Electronic online auction firms (eBay)
– Industrial products sold in B2B markets
(Chemdex, Converge.com)
Channel Ownership and Function:
Types of Intermediaries
• Manufacturer’s own sales force (direct)
• Online channel (direct)
• Manufacturer’s representatives (indirect)
• Industrial distributors (indirect)
©McGraw-Hill Companies, Inc. 2002
22
6
Variables Affecting Channel Structure
Categories of Variables
1.
2.
3.
4.
5.
Market Variables*
Product Variables*
Company Variables*
Intermediary Variables
Environmental Variables
1. Market Variables
Market Geography
Location, geographical size,
& distance from producer
Market Size
Number of customers in a
market
Market Density
Number of buying units
(consumers or industrial firms)
per unit of land area
Market Behavior
Who buys, & how, when, and
where customers buy
6
6
2. Product Variables
•
•
•
•
•
•
Bulk & Weight
Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness
3. Company Variables
Size
The range of options is
relative to a firm’s size
Financial
Capacity
The greater the capital, the
lower the dependence on
intermediaries
Managerial
Expertise
Intermediaries are necessary
when managerial experience
is lacking
Objectives
& Strategies
Marketing & objectives may
limit use of intermediaries
6
4. Intermediary Variables
Availability
Availability of intermediaries
influences channel structure.
Cost
Cost is always a consideration in
channel structure.
Services
Services that intermediaries
offer are closely related to the
selection of channel members.
6
5. Environmental Variables
Competitive
Economic
Sociocultural
The impact of environmental forces is
a common reason for making
channel design decisions.
Technological
Legal
6
How Do You Evaluate
Alternative Channels?*
• Channel Goals: Channel efficiency and
effectiveness
– Expected sales and costs*  value
– Control and required resources
– Flexibility
– Learning and Knowledge
©McGraw-Hill Companies, Inc. 2002
29
Break-even Cost analysis: Company Sales
Force (direct channel) and a Manufacturer’s
Sales Agency (indirect channel)
Manufacturer’s
Sales Agency
Sales Cost
Company
Sales Force
Sales
Costs
Se
Sales volume
Exhibit 3.3
©McGraw-Hill Companies, Inc. 2002
Level of Sales
30
Topic 5
Various Approaches for Choosing
Channel Structure
6
• “Characteristics of Goods & Parallel Systems”
Approach* (Table 6.2 on p. 207)
• Transaction Cost Analysis Approach*
• Firm Capability-based Approach
“Characteristics of Goods & Parallel
Systems” Approach*
Characteristic
Red Goods
Orange Goods
Yellow Goods
Replacement
Rate
High
Medium
Low
Gross Margin
Low
Medium
High
Adjustment
Low
Medium
High
Time of
Consumption
Low
Medium
High
Searching Time Low
Medium
High
Ex)
Yogurt
Luxury Car
6
Transaction Cost Analysis (TCA)*
• Focus: Acheiving Highest Economic Efficiency
• Costs occur whenever firms perform channel “functions”
– Fixed and variable components.
• TCA states that firms should purse the most efficient
channel arrangement based on cost avoidance.
– “Make” option = Direct channel
– “Buy” option = Indirect channel
33
The Continuum of Interfirm
Exchange Format*
Franchise
Systems
Hierarchy
(Make)
Buying
Groups
Market Setting
(Buy)
* My latest thought on continuum
34
Key Assumptions and Dimensions of TCA**
• Channel members negotiate, monitor, and enforce
exchange aspects by considering:
• Two assumptions
– Bounded rationality
– Opportunism
• Three transaction dimensions
– Uncertainty (Internal and External)
– Specificity of assets
– Frequency of transactions
Ex) Fashion Apparel (e.g., Nicole Miller)
35
Choosing Internal versus External Transactions*
• Conditions for choosing “Make” (Internal =
Using Your own salesforce or shop) over “Buy”
(external = Using independent distributor):
– A high level of environmental uncertainty should exist in the
transaction cost assessment.
– The assets involved should be highly specialized and unique to
the exchange process.
– The transaction should occur frequently.
• Examples: Sherwin-Williams; Curtis Mathes
• Third Breed: Clan Mechanism; Partial Integration
36
6
Firm Capability-based Approach
IF
A firm’s own capability
to perform a function
V
Outside suppliers’ capability
Internalize the function!
Topic 6
Three Steps To Take for Selecting
the Best Channel Design*
1. Analyzing Channel Objectives and
Product Characteristics:
2. Analyzing Desired Channel (Service)
Output Utilities:
3. Analyzing Market Behaviors and
Segments
©McGraw-Hill Companies, Inc. 2002
38
1. Analyzing Channel Objectives
and Product Characteristics
• Channel Objectives
• Product Characteristics
–
–
–
–
–
Unit value: length
Standardization: length, intensity
Bulkiness: length
Complexity: length, intensity
Stage of Product Life Cycle: intensity, ownership
 Implications for level, intensity, and ownership and
function
©McGraw-Hill Companies, Inc. 2002
39
2. Analyzing Desired Channel
Output Utilities
• Lot size utility
• Convenience (time/spatial) utility
• Assortment/Variety Utility
• Service utility
©McGraw-Hill Companies, Inc. 2002
40
3. Analyzing Market Behaviors
and Segments
• Current and potential buyer behaviors:
– Who is doing the buying?
• Where,when and how end users buy:
– Seasonal
– Shopping from home
• Knowledge of industry (and its language)
©McGraw-Hill Companies, Inc. 2002
41