Chapter 15
Designing and Managing
Value Networks and
Channels
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Copyright © 2003 Prentice-Hall, Inc.
Key Points for Chapter 15
1.
2.
3.
4.
5.
6.
Push strategy and Pull strategy
Value network
Marketing channel member functions
Five service outputs
Exclusive, Selective, Intensive Distribution
Trade-relations mix between producer & its
channel members
7. Motivating channel members
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Key Points for Chapter 15
8. Vertical marketing system
9. Horizontal Marketing system
10. Channel conflicts; Vertical, Horizontal,
Multichannel
11. Managing channel conflict
12. Legal and ethical issues in channel relations
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Marketing Channels and Value
Networks
 Marketing Channels
 Sets of independent organizations involved in the
process of making a product or service available for use
or consumption
 Types of Intermediaries
 Merchants
 Agents
 Facilitators
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Marketing Channels and Value
Networks
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The Importance of Channels
Channel Development
Hybrid Channels
Understanding Customer Needs
Value Networks
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The Importance of Channels
 Represent a substantial opportunity cost.
 30 to 50% of the final selling price.
 Not only serve markets, but also make markets
by converting potential buyers into actual
buyers
 Affect all other marketing decisions: Product,
Price, and Promotion
 Involve relatively long-term commitments to
other firms
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Push versus Pull Marketing
 Push strategy
 The producer uses its sales force and trade promotion
money to induce intermediaries to carry, promote, and
sell the products to end users
 Used for items of low brand loyalty, brand choice made
in the store, impulse purchase, and product benefits well
understood
 Pull strategy
 The producer uses advertising and sales promotion to
induce consumers to ask intermediaries for the product
 Items of high brand loyalty, brand choice made before
going to the store, and high perceived difference
between brands
 Both Pull and Push strategies: Top marketing
companies
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Channel Development
 A new firm typically starts as a local operation
using existing intermediaries
 If the firm is successful, it might branch into new
markets and use different channels in different
markets
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Hybrid Channels
 Multiple channels used in any one market area
 Companies using hybrid channels must make
sure these channels work well as one team
 Channel Integration expected by customers
 Ability to order a product online, and
pick it up at a convenient retail location
 Ability to return an online-ordered
product to a nearby store.
 U.S. mail order firms’ facilities in Japan to
receive customers’ returned goods
 Right to receive discounts based on the
total of online and off-line purchases
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Understanding Customer Needs
 Factors for choosing the channel by
consumers
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Price
Product assortment
Convenience
Shopping goals: economic, social, or
experiential goals
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Value Networks
 Demand Chain Planning
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Company should first thinks of the target market
Design the supply chain backward from that point
Sense-and-respond view of the market
Replace the out-dated Supply Chain Concept
(Make & Sell)
 A company is still at the center of a value network- a
system of partnerships and alliances of a firm
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Value Networks
 Value Network
 A system of partnerships and alliances that a firm
creates to source, augment, and deliver its offerings
 The firm needs to orchestrate these parties to enable
them to deliver superior value to the target market.
 It requires increasing investments in information
technology (IT) and software like Enterprise
Resource Planning (ERP) system
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The Role of Marketing
Channels?
 Channel Functions and Flows
 Channel Levels
 Service Sector Channels
15-13
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Why Are Marketing Intermediaries
Used?
 Many producers lack the financial resources to
carry out direct marketing
 In some cases direct marketing simply is not feasible
 Intermediaries usually offer the producer more than
it can achieve on its own through their contacts,
experience, specialization, and scale of operation
 Smooth the flow of goods and services
 Reduce the number of contacts and the work.
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Channel Functions and Flows
 Key Functions include: Table 15.1
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Gather information
Stimulate purchasing
Reach agreements on price & other terms
Place orders
Finance inventories
Assume risk
Successive storage and movement of
physical products
 Provide for buyers’ payment
 Oversee actual transfer of ownership
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Figure 15.2: Five Marketing Flows in the Marketing Channel
for Forklift Trucks
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Channel Functions and Flows
 Types of Channels required by a
manufacturer
 Sales channel
 Delivery channel
 Service channel
 All channels have scarce resources and they
can often perform better through specialization
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Channel Levels
 Fig. 15.3
 Zero-level channel (a.k.a. direct-marketing
channel)
 One-level channel
 Two-level channel
 Three-level channel
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Service Sector Channels
 Producers of services also face the problem of
making their output available and accessible to
target customers
 Internet advances service industries’ ability to
reach target customers:
 Banking, insurance, travel, education, and stock
trading
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Channel-Design Decisions
 Four(4) Steps
 Analyze Customers’ Desired Service Output
Levels
 Establish Objectives and Constraints
 Identifying Major Channel Alternatives
 Evaluate the Major Alternatives
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Analyze Customers’ Desired
Service Output Levels
 Lot size
 The number of units purchased on one occasion
 Waiting and delivery time
 The average time waiting for the receipt of goods
 Spatial convenience
 The degree of easiness to purchase the product. The
more retailers, the easier for customers to shop
 Product variety
 The assortment breadth. Prefer a greater assortment
 Service backup: Add-on services
 Credit, delivery, installation, and repairs
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Analyze Customers’ Desired
Service Output Levels
 Providing greater service outputs means
 Increased channel costs
 Higher prices for customers
 The success of discount stores indicates that
many customers are willing to accept smaller
service outputs if they can save money.
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Establish Channel Objectives and
Constraints
 Companies should state their marketing
channel objectives in terms of targeted service
output levels
 Identify several market segments that desire
different levels of service
 Decide which market segments to serve and the
best channels to use in each case
 In each segment, minimize the total channel
cost of meeting customer service requirements
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Identify Major Channel
Alternatives
 Types of Intermediaries
 Channel Alternatives for Cellular Car
Phones. Table 15.2
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OEM market
Auto-dealer market
Retail auto part Stores
Car phone specialist dealers
Mail-order market
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Identify Major Channel
Alternatives
 Exclusive distribution
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One or a select few number of intermediaries
Includes exclusive dealing arrangements
Requires greater partnership
New prestige automobiles (Bently) , some major appliances,
prestige women’s apparel brands
 Selective distribution
 More than one but fewer than all of intermediaries who are
willing to carry a company’s products
 Television, furniture, small appliance brands-Kitchen Aid,
Maytag, Whirlpool, GE
 Intensive distribution
 Placing goods or services in as many outlets as possible
 Most convenience goods-Tobacco, soap, gum, snack foods
15-25
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Identify Major Channel
Alternatives
 Terms and Responsibilities of Channel Members:
trade-relations mix
 Price policy
 A price list and schedule of discounts and allowances that
intermediaries see as equitable and sufficient
 Conditions of sale
 Payment terms and producer guarantee against defective goods
or price declines
 Distributors’ territorial rights
 Define the distributors’ territories and the terms under which
the producer will enfranchise other distributors
 Mutual services and responsibilities
 Define what services are provided to the distributors and their
responsibilities to the producer, or the seller.
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Evaluate the Major Alternatives
 Economic Criteria
 Each channel alternative produces a different
level of sales and costs. Fig. 15.4
 Selling an industrial product costing $2,000-$5,000
 $500 by field sales, $200 by distributors, $50 by
telesales and $10 by Internet per contact
 Selling a retail banking service: cost per transaction
 At a branch $4.07, Phone $0.54, ATM $0.27,
Web-based $0.01
 Switching customers to lower-cost channels without a
loss of sales and deterioration in service quality
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Figure 15.4: The Value-Adds versus Costs of Different Channels
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Evaluate the Major Alternatives
 Cost comparison between a company sales
force and manufacturers’ sales agency. Fig.
15.5
 At the beginning, manufacturers’ sales agency costs
less but costs more later on after the breakeven sales
level
 Sales agencies tend to be used by smaller firms or by
large firms in smaller territories where the volume
is low
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Figure 15.5: Break-even Cost Chart
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Evaluate the Major Alternatives
 Control and Adaptive Criteria
 Using a sales agency poses a control problem, since
it is an independent firm seeking to maximize its
own profit
 A sales agency may concentrate on the customers who buy
the most, not necessarily those who buy the manufacturer’s
goods
 Might not master technical details or handle promotions
effectively
 Must make some degree of commitment to each
other but
 In rapidly changing, volatile, uncertain markets, the
producer needs channel structures and policies that
provide high adaptability
15-31
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Channel-Management Decisions
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Selecting Channel Members
Training Channel Members
Motivating Channel Members
Evaluating Channel Members
Modifying Channel Design &
Arrangements
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Copyright © 2003 Prentice-Hall, Inc.
Channel-Management Decisions
 Channel power producers can use:
 Coercive power
 Threaten to withdraw a resource or terminate a relationship
if intermediaries fail to cooperate
 Reward power
 Offer intermediaries an extra benefit for performing specific
acts or functions
 Legitimate power
 Request a behavior that is warranted under the contract
 Expert power
 Have a special knowledge that the intermediaries value
 Referent power
 Are so highly respected that intermediaries are proud to be
associated with. IBM, Caterpillar, Microsoft
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Channel Integration and
Systems
 Vertical Marketing Systems
 Horizontal Marketing Systems
 Multichannel Marketing Systems
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Vertical Marketing Systems (VMS)
 Conventional Marketing Channel
 Consists of an independent producer, wholesalers
and retailers
 Each seeks to maximize its own profits
 No channel member has complete or substantial
control over other members
 Vertical Marketing System
 Consists of the producer, wholesaler(s) and
retailer(s) acting as a unified system.
 One channel member (channel captain) owns others
or franchise them or has so much power that they
all cooperate.
 70% to 80% of the total U.S. markets
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Vertical Marketing System (VMS)
 Corporate VMS
 Production and distribution under single ownership
 Sears obtains over 50% of goods from partially or wholly
owned firms
 Sherwin-Williams: produces paint and also owns and
operates 2,000 retail stores
 Administered VMS
 One member emerges as dominant in channel
through size and power
 Manufacturers of dominant brands: Kodak, Gillette,
Proctor & Gamble, Campbell Soup, GE
 Manufacturers identify distributor needs and build up
merchandise programs to help each distributor operate as
efficiently as possible
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Vertical Marketing System (VMS)
 Contractual VMS
 Wholesaler-sponsored voluntary chains
 A wholesaler organizes a voluntary chain of retailers.
Certified Grocers
 Retailer cooperatives
 Retailers organize a new business entity to carry on
wholesaling and possible some production. Independent
Grocers Alliance
 Franchise organizations
 Manufacturer-sponsored retailer franchise
 Auto makers and dealers
 Manufacturer-sponsored wholesaler franchise
 Soft drink producers and bottlers
 Service-firm-sponsored retailer franchise
 Auto Rental, Hotels, Fast Foods
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Vertical Marketing System(VMS)
 The New Competition in Retailing
 Increased competition between VMS and
large independent retailers
 New competition is between whole systems of
centrally programmed networks to achieve
the best cost economies and customer
response
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Horizontal Marketing Systems
 Two or more unrelated firms put together
resources or programs
 Each firm lacks the capital, technology,
marketing resources, or other resources to take
on the venture alone
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Multichannel Marketing Systems
 A single firm uses two or more marketing
channels to reach one or more customer
segments
 Advantages
 Increased market coverage
 Lower channel costs
 More customized selling
 Disadvantages
 Channel conflict problem
 Channel control problem
15-40
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Multichannel Marketing Systems
 Planning Channel Architecture
 Using only one channel is not efficient
 Fig. 15.6: The Hybrid Grid
 Lead generation through telemarketing, direct mail,
advertising, and trade shows
 Closing the sale or account management by sales force
 Should use different channels for selling to differentsize customers
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Conflict, Cooperation, and
Competition
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Types of Conflict and Competition
Causes of Channel Conflict
Managing Channel Conflict
Dilution and Cannibalization
Legal and Ethical Issues in Channel
Relations
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Types of Conflict and Competition
 Vertical channel conflict
 Conflict between different levels within the same
channel
 Horizontal channel conflict
 Conflict between members at the same level within the
channel
 Multichannel conflict
 Conflict between one channel with other channels
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Causes of Channel Conflict
 Goal incompatibility
 Producers want rapid market penetration with a low
price, while dealers prefer high margins
 Unclear roles and rights
 Company sales force and authorized dealers go after
the same large customers
 Differences in perception
 Producers are optimistic and want dealers to carry
higher inventory, while dealers are pessimistic
 Intermediaries’ dependence on the
manufacturer
 Fortunes of dealers are profoundly affected by the
producer’s product and pricing decisions. Creates a
high potential for conflict.
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Causes of Channel Conflict
 By adding new channels, a company faces
the possibility of channel conflict which
may include:
 Conflict between the national account
managers and field sales force
 Conflict between the field sales
force and the telemarketers
 Conflict between the field sales
force and the dealers
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Managing Channel Conflict
 The challenge is not to eliminate conflict but to manage it
better. Table 15.3
 Adoption of superordinate goals
 Channel members agree on the fundamental goals they are
jointly seeking. Easily agreed when the channel faces an
outside threat
 Exchange personnel between channel levels
 Co-optation
 Appoint the leaders of other organizations or other channel
levels on advisory council or board of directors
 Joint membership in and between trade associations
 Universal product code (UPC) jointly developed by Grocery
Manufacturers Association and Food Marketing Institute
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Managing Channel Conflict
 Diplomacy
 Each side sends a person to meet with its
counterpart to resolve the conflict
 Mediation
 Resorting to a third party to conciliate two parties’
interests as a consultant or an advisor
 Arbitration
 Resorting to a third party for a final resolution of
the conflict
 Litigation
 Best way is to avoid the litigation
 Costs a lot and takes a long time
 Bad publicity for both parties, whether one party
wins or loses
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Legal and Ethical Issues
in Channel Relations
 Exclusive dealing (distribution)
 Seller requires its exclusive dealers not to handle
competitors’ products
 Legal as long as it does not substantially lessen
competition nor tend to create monopoly and both
parties enter into the agreement voluntarily
 Exclusive territories
 Producer agrees not to sell to other dealers in a
given area and dealer agrees to sell only in its own
territory.
 The first practice is perfectly legal
 The second practice, whereby producer keeps
dealers from selling outside their territories, has
become a major legal issue
15-48
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Legal and Ethical Issues
in Channel Relations
 Exclusive Territories (Continued)
 A law suit by GT Bicycles against Price-Costco Chain which
sold 2,600 high-priced mountain bikes at a huge discount.
Originally sold to middleman to export to Russia (L.A. Times,
March 30, 1997). GT Bicycles lost in its lawsuit.
 Tying agreements
 Full-line forcing
 Producer sells to dealers only if the dealers take some or all of
the rest of the line
 Legal if it does not substantially lessen competition
 Dealers’ Right
 Producers are free to select their dealers but their right
terminate dealers is somewhat restricted.
 Can drop dealers only for cause in the contract
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E-Commerce Marketing Practices
 E-business
 E-commerce
 E-purchasing
 E-marketing
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E-Commerce Marketing Practices
 Business-to-Consumer (B2C) ECommerce
 Business-to-Business (B2B) E-Commerce
 Brick-and-Click Companies
 M-Commerce
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Business-to-Consumer (B2C) ECommerce
 Commerce sites (E-tailers):
 Sell products and services directly to final buyers via
the Internet: Amzon.com. Expedia.com, Buy.com
 Search engines and portals:
 Yahoo, Google, Excite
 Internet Service Providers (ISPs):
 Provide Internet and email connections for a fee or
free: AOL, Earthlink
 Transaction sites: Auction sites
 E-bay
 Contents sites:
 N.Y.Times, Encarta, ESPN, Encyclopedia Britannica
Online
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Business-to-Consumer (B2C) ECommerce
 The Internet is most useful for products and
services
 whose buyers seek greater ordering convenience
(books, music) or lower cost (stock trading, news
reading, banking)
 whose buyers seek information to compare product
features and prices among vendors (automobiles,
computers)
 The Internet is less useful for products
 that must be touched or examined in advance. But
exceptions to this are growing as confidence in
vendor’s quality or performance is increasing.
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Business-to-Business (B2B) ECommerce
 B2B sales far exceed B2C sales
 Provides product information, customer
purchasing, & customer support services
online
 Online buyers can get necessary information
from
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Suppliers’ Websites
Infomediaries:
Market makers
Customer communities
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Brick-and Click Companies
 Strategies for Acceptance of a firm’s online sales
by Intermediaries
 Offer different brands or products on the Internet
 Offer the off-line channel members higher commissions
to cushion the negative impact on sales
 Take orders on the website but have retailers deliver
and collect payment
 Share commissions of online sales with intermediaries
 Provide online benefits to intermediaries:
 Virtual Dealership
 It costs auto companies and their dealers much less
than the present dealership system where cars sit in
inventory for 70 days and ad & promotion cost 10% of
the car price
15-55
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M-Commerce
 Using a cell phone, personal digital assistance
(PDA) or any other mobile communication
device in conducting business
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