MARKET CHANNELS STRATEGY ISSUES
Lecture Notes
MBA
Summer 2002
ANALYZING MARKET CHANNELS
1.
Major changes in marketplace are in the trading channel - 3rd party legal entities
apart from the final buyer and the original seller
2.
Channel marketers determine a producer's marketplace competitiveness
3.
Channels perform critical functions and hence survive and flourish
4.
Services performed are varied and important and helps shape the economy.
Effective trading channel relationships make the difference in economic
development
5.
Key issues in channel management:
a.
a macroeconomic understanding of how and why the different types of
channel services and participants evolved
b.
an understanding of the major changes occurring today in channels of
distribution
6.
Understanding how channels evolved helps to explain how and why they are
likely to change in the future
KEY ISSUES IN THIS UNIT
1.
The modern market economy was created by wholesale merchants and retailers,
not by large manufacturers
2.
Technical innovations, such as the development of the telegraph and railroads,
changed the village economy into a national economy. New technologies, such as
computers, satellites, and jumbo jets, are changing national economies into a
global economy
3.
Physical distribution channels are becoming integrated by information and
transportation conglomerates
4.
New, low-cost distribution channels. such as Wholesale Clubs, are changing the
nature of some product-markets
5.
Franchising enables a new retailing innovation to spread rapidly into new
geographical markets
6.
Many different forms of channel intermediaries exist. They vary in their skills and
competence, cost efficiencies, and willingness to allow a manufacturer to control
what they do
7.
A seller needs to monitor how its trading relationships with its portfolio of
distributors or types of channel is changing
8.
Channel resellers should be evaluated on the history of their trading performance,
market positioning, competitive effort, and purchasing behavior
9.
Even sellers who do not use distribution channels use facilitator relationships that
help them find and serve customers more competitively
10.
The global marketer has to find the unique distribution channels that exist in each
national economy
11.
An increase in global sources of supply increases the power and potential profits
of well-managed and well-positioned distributors and retailers in the U.S.
THE LESSON OF HISTORY:
MARKETING CHANNELS THAT CREATED THE MODERN ECONOMY
1.
Marketing folklore: Mass marketing resulted from mass production
Reality (Alfred Chandler's theory): Large centralized wholesaling companies
which arose from efficient distribution systems resulting from improved
communication and transportation systems created and drove mass production.
The impetus came from massive investment in the communication and
transportation infrastructure at the turn of the century (national railroad system,
telegraph, and steamship)
2.
At mid-19th C, the cost of distribution beyond local markets was prohibitively high
and was a constrain on the economies of scale in mass production. Merchant
businesses and activities were largely proscribed by local marketed
3.
A change in scale:
A new class of merchant, the wholesale jobber, arose in the 1860s. They took title to
the goods. Railroads accentuated the effectiveness of the salesmen's reaching the
buyers with samples, catalogs, and a more reliable delivery service.
The wholesaler now define its market in national terms and gain huge economies
of scale from bulk purchasing and buying expertise.
4.
Global and domestic politics spawned and nourished the economic innovation:
The peace and stability of post-Napoleonic-War Europe saw its production rise and
need for export markets. Surplus imports into the US were auctioned off to the
wholesale jobbers at bargain prices.
The Civil War further benefited the jobbers supplying the armies.
5.
The wholesale buyer: Large orders and mass production
The wholesaler's traveling sales forces spearheaded the mass marketing revolution.
They introduced new products, spread merchandising innovations, and taught local
retailers the rudiments of bookkeeping and retail management. The sales forces also
reported back on regional economic conditions, new products and ideas, changes in
demand, and retailer credit ratings (market intelligence and market research)
A new breed of professional buyers who were very knowledgeable about product
groups arose simultaneously. They developed skills and expertise and a broad vision
of the marketplace and its needs that far exceeded that of the manufacturer or final
buyer/end-user. They were given autonomy and often benefited in profit-sharing
plans. The fortunes of the wholesalers depended on their skills.
Specialization within the wholesaling function was nurtured.
a.
Buying offices were established in Europe to search for better buys and new
products.
b.
Separate traffic depts handled the shipping and negotiated special bulk rates
with the railway and steamship companies.
c.
Credit and collection depts introduced standardized payment terms
The growing scale of the wholesalers' operations gave them not only great buying
power, but also the opportunity to encourage mfgs to expand so as to be able to fill
the wholesaler's large orders.
Thus mass distribution led and fostered the development of mass production.
6.
Making money from stock-turn rather than margins:
Wholesalers flourished when they discovered that profits came from BOTH margin
and stock-turn. Introduced in the 1860s, wholesalers focused on stock-turn
7.
Power-shift to retailers:
1880: backward vertical integration by retailers shifted power from wholesalers to
retailers.
1880: Consumers were more urban, sophisticated, and demanding. Retailers benefited
from being closest to the consumers
8.
Growth of mass merchandisers/retailers: TCR
Department stores in NYC spread to other major urban centers. Profitability came
from sales volume and stock-turn instead of margin.
Macy's in 1887: 6 stock-turns in 6 months! Double that of the 1990s with computers!
Dept stores' low prices wiped out small retailers.
Same merchandising practice as today's: extensive local ads, money-back guarantees,
and mark-down sales of slow-turning items.
9.
Mail-order houses:
Rural buyers' needs met by mail order firms
Rapid rail and postal service expansion benefited Sears. $0.75M in 1895 to $38M in
1905.
Wholesalers and retailers opposed parcel posts service introduced in 1912!
10.
Chain stores:
First chain stores were grocers, drug stores, and furniture stores in urban markets
where dept. stores concentrated in clothing and furnishings.
Great American Tea Company (A&P)
Great Western Tea Company (Kroger)
Jewel Tea Company
Woolworth - first 5 and dime variety stores
Operationally same as dept stores except with greater control over operations and
logistics. Assisted by newly introduced telephones.
Innovative management - local managers had minority ownership in store like today's
retail franchises)
Competitive advantage from large buying power, lower margins but higher stockturns, scientific selection of store locations, standardized ads, standardized store
arrangement, window displays, sales training, inventory control, and cash-and-carry
setup.
To fight chain store explosion, Sears and Montgomery Ward opened their own stores.
Other retailers resorted to the political process to fight off the chain stores - tax and
price control legislations
11.
The supermarket
1920s: first suburban shopping centers and shopping malls.
Great Depression: lower priced supermarkets flourished while many small merchants
failed
Factors attributed to supermarkets' success:
Refrigeration allowed for in-home, in-store, and in-transit storage of perishables was
largely responsible for the success of the supermarket. (Technological innovaiton)
Self-service reduced labor and inventory holding costs, enabled consumers to
experiment with new products, and paved way for brand image marketing by mfgs Pillsbury and Betty Crocker (marketing innovation)
New ad media introduced - radio, magazines with superior graphcis, and TV
launched the golden era of household brands marekting (1950-1990)
Demographic shits of 1950s:suburban shopping overtakes downtown shopping:
Suburban sprawl and inner-city congestion and decay. Current form of suburban
malls developed - anchor stores surrounded by specialty boutiques and service stores.
12.
1970s and 1980s innovations:
No new forms of retailing
New channels of distribution for pharmaceuticals and health-care services and
products sold in convenience stores, discount drug stores, supermarkets, and dept
stores
Retailing of health-care and medical services - unbundling of services of community
hospitals and new competition among health care providers
Soft goods and fast foods are increasingly sold in supermarkets
Mass merchandizers took business from specialty stores 9 cameras, hi-fi systems, etc.
Dept stores squeezed by discount stores and off-pricing stores on one side and by
premiumn fashion chains (The Limited and Lands' End) on the other
Warehouse Clubs making inroads into traditional supermarkets, drugstores, and
discount stores. Efficiency of WCs: 7-9% operating expenses; 19-21% for traditional
grocers! TCR - competitive advantage. Wheel of Retailing
13.
Changes in industrial channels:
Changes not as dramatic as in consumer products channels
Distribution functions integrated, leading to major changes in order-processing,
transportation, and warehousing.
Recent advances in distribution and channel management due to:
a.
Marketers rediscovered the neglected area of distribution. Found that cost
reduction and/or service differentiation increases considerable competitive
advantage
b.
Inflation in the 1970s and high interest rates of the 1980s also focused
attention on distribution management
c.
Profit leverage arising from cost reduction in distribution than to increased
sales during an era of increased competition and recession further generated
more interest in channel management
d.
Computerized integration of order processing, warehousing, and dispatching
functions did not become common until the early 1980s.
e.
Global marketing places a premium on logistic efficiencies.
FUTURE CHANNEL
RELATIONSHIP TRENDS
1.
2.
Integrated Channel Information Systems
a.
Electronic info technology has greatly reduced inventories and dead stock
b.
Savings in time, documentation, and paperwork are profound
c.
Buyers can now consult electronic catalogs; catalogs can be updated
continually rather than seasonally
d.
Stock can be tracked in real time via UPC codes
e.
Performance of channel members can be easily tracked to determine
relationship profitability
f.
Accountability for relationship profitability increases the competitive
focus of survivors
Integrated Transportation Conglomerates
a.
Technological improvements
• containerization
• automated warehouse
b.
Deregulation and standardization has led to:
• opportunity for full-service, integrated-transportation freight forwarders
• innovations in delivery systems (eg. JIT)
• transportation services buying title to goods shipped or offering a lease-back
agreement with the customer
3.
4.
The Growth of Franchising Relationships
a.
Estimate: By 2000, 50% of retail establishments will be franchises
b.
Franchisers offer services to increase franchise attractiveness
c.
Franchisees benefit from centralized marketing decision making (when the
decision are good)
The Growth of Channel Buying Groups
Buying power becomes competitive when individual businesses spool their resources
for mutual benefit
MASS MARKET - MASS DISTRIBUTION
Mass distribution is best suited for products with the following characteristics:
inexpensive
easy to try
frequently purchased
non durable
low risk
a mature product-market
1.
Economies of scale and scope
a.
focus of competition:
reducing cost of distribution and keeping shelves stocked
b.
large packaged-goods companies have the advantage of reducing fixed and
variable cots in established channels
c.
New entries have to:
i)
ii)
cut a deal with centralized buying organizations
piggy-back on another manufacturer's distribution system
iii)
saturate a very localized market
SPECIALTY DISTRIBUTION
Consumer franchise
1.
Distributor's or retailer's goodwill and reputation influence relationships
2.
For mass market product, consumer franchise is based on convenience and price
image
3.
In specialty markets, consumer franchise is also shaped by expertise, service and
image
THE BASIC FUNCTIONS OF
CHANNEL PARTICIPANTS
Reselling products into a market that could not be reached as efficiently or effectively by the
original seller
1.
Intermediary's role is to facilitate:
• transportation
• storage
2.
Additional roles of an intermediary:
• customer training
• customer education
• aftersales maintenance and repair services
3.
Risk-taking and financing of intermediaries has been reduced over time by:
• selling on consignment
• shelf-slotting allowances
4.
Some risks are taken on seasonal products
Today, most breaking down, repacking, or further processing is handled at the top of the
channel
Channel member communicate valuable customer info up the channel
1.
Competence, cost, and control:
Responsibility for distribution and marketing
should be decided on these three
factors
2.
Predicting the future fit of a relationship:
Change is expensive and potentially damaging to one or more members of a channel.
Correctly anticipated change can be profitable
3.
Evolutionary rigidity in trading relationships:
a.
evolutionary rigidity provides opportunity to innovators who correctly gauge
strains re negotiation with channel members
b.
rigidity can effect all channel members if the competition is allowed to move
freely, without imitative response to profitable innovations
THE CHANNEL RELATIONSHIP AUDIT
Channel change audit considers:
1.
Changes in technology
2.
New entrants
3.
Changes in established channel relationships
4.
Changes in the way existing members do business
Basic questions that need answers:
1.
Who are the latest new entrants in the reseller market?
What is their competitive advantage?
Which existing resellers are being most affected?
How will it affected us?
2.
What new trading coalitions between resellers are occurring?
What will be their competitive advantage?
How will it affect us?
3.
What changes in order-processing technology are now occurring?
What impact will it have on the way business is done?
What competitive advantage do they provide?
4.
What changes in transportation technology are now occurring?
What impact will it have on the way business is done?
What competitive advantage do they provide?
5.
What changes in warehousing technology are now occurring?
What impact will it have on the way business is done?
What competitive advantage do they provide?
6.
What changes in payment technology are now occurring?
What impact will it have on the way business is done?
What competitive advantage do they provide?
CHANNEL RELATIONSHIP ANALYSIS IN GLOBAL MARKETS
Tribal networks work for the participants and against non-participants
The U.S. has a comparatively weak tribal network for cultural reasons.
1.
Global tribal relationship networks
a.
The Jewish tribal network
Diaspora found the Jews the classic global trade intermediaries and
merchants
Shared estrangement and alienation and common culture led to a shared trust
and deal-making rules that were necessary for survival
Deals by a handshake led to low transaction costs and low risks within and
across borders
Dispossessed of land and property refocused the Jews on mobile human
capital - emphasis on education.
Ironically, this also gave them greater mobility, enabling them, as traders and
financiers, to follow and expand the flow of international commerce and to
become worldly wise and intensely skilled and competitive in their trading.
b.
The British tribal network:
The British Empire spawned and spread much of the modern culture such is
common trading and scientific language, and its law, science, and arts. The de
facto international language of commerce, science and technology is English
(maybe American; ask the French about McCrossaint, disk-drive, megabyte)
Need to seek new resources, new markets, new international trade led to new
lands to colonize --> aggressive colonial policy of 1600 - 1900
Empire consisted of North America, India, the Caribbean, Africa, Southeast
Asia, Australia, and New Zealand
Fortune seeking abroad driven by Calvinist acceptance of merchant profits
and concern over idleness.
Ben Franklin: "Remember, that time is money"
Britain spread hard-technology around the world: steam engines and railways,
manufacturing technology
Also soft-technology: cost accounting, financial accounting, and all types of
management and marketing decision-making activities
c.
The Japanese tribal network:
Adopted and improved Western technology - manufacturing and distribution
innovations - to develop the greatest modern tribal network
Japanese trading companies send scouts out on global wanderings and
management assignments of 2 to 5 years, supported by a network of Japanese
owned hotels, spas, bars, restaurants, schools, and golf-clubs
Based on clans of 300 years ago - ethos of mutual self-help that has
transcended national borders.
Important value - reinvesting almost all profits back into expanding the family
business, into new markets, or new technologies. Result: large networks of
extraordinarily adaptive, efficient, and aggressive small firms
Succession tradition preserves the total enterprise
c.
The Chinese tribal network:
Network of Overseas Chinese in Taiwan, Hong Kong and Southeast Asia
Coupled with their extraordinary energy and enterprise is a great willingness
to cooperate with local business partners
Mainly family owned and operated businesses and investing in their children's
education. Extended family - the clan - emphasizes discipline, self-control, a
Confucian work-ethic, and frugality
Many people have underestimated the importance of the above trading tribes:
Europeans vilified the Jews
France and Germany: Britain - a nation of
shopkeepers
East African nations: Kenya, Tanzania, Uganda learned a bitter lesson about the importance
of global tribal networks when they expelled their Indian communities and their export
trade and as well as domestic channel systems promptly collapsed
Emerging economies struggle to either create their own tribal network or ally with an
existing one. Especially in Russia, India, Pakistan, Egypt, and Brazil.
Alternative to tribal networks?
Develop a close facilitating relationship with one of the existing global tribal networks or to
operate at a severe and sustained competitive disadvantage.