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CHAPTER 7
CHANNEL MANAGEMENT
RETAILING
WHOLESALING
PHYSICAL DISTRIBUTION
Topics:
A. Channel Systems, Design, and Control
B. Retailing
C. Wholesaling
D. Physical Distribution
E. Legal Aspects of Channel Management Area
A. CHANNEL SYSTEMS, DESIGN, AND CONTROL
Topics:
1. Resolving Discrepancies of Quantity and Assortment
2. Channel Complexity
3. Dual/Multiple Distribution
4. Degrees of Market Exposure
5. Methods of Channel Cooperation
6. Channel Conflict
7. Power
8. Types of Channel Control
9. Marketing Functions
(1) Resolving Discrepancies of Quantity and Assortment Discrepancy of Quantity:
Discrepancy of Assortment:
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Regrouping Activities for Quantity Discrepancies:
Accumulation Process:
Allocation Process:
Regrouping Activities for Assortment Discrepancies:
Sorting-Out Process:
Assorting Process:
(2) Channel Complexity
Channel complexity is a function of:
1. The number of levels of channel intermediaries.
2. The number of members at each level.
Channel complexity increases as the number of levels and/or the number of members at each
level increase because the number of transactions (interactions) across channel members
increases in such situations.
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Channel intermediaries:
•
•
•
•
Wholesalers
Retailers
Agents
Brokers
Wholesalers: Primarily buy from manufacturers and sell to retailers.
Retailers: Primarily buy from manufacturers and wholesalers and sell to final consumers.
Agents: Represent sellers and try to find buyers for the sellers (e.g. 5 real estate agent, travel
agent).
Brokers: Bring buyers and sellers together (e.g., food broker - finds buyers (canned food
producers) and sellers (supermarkets) to generate transactions).
Channel Structure: There are four primary channel structures. The various channel structures
differ in terms of the number of different levels of channel intermediaries. Figure 7,1 illustrates
the different structures.
Figure 7.1. Channel Structures
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Examples:
Channel 1: Tupperware, Avon - independent sales representatives (agents) sell company products
to final consumer.
Channel 2: Kellogg's sells to Kroger supermarkets; Kodak sells to Sears department store. The
retailers then sell to final consumers.
Channel 3: A cigarette manufacturer sells to local wholesalers that sell to small confectionary
stores. Farmers sell to produce wholesalers that sell to local green grocers and other retailers. The
retailers then sell to final consumers.
Channel 4: A foreign agent represents a foreign pro¡ducer of artifacts who sells to a domestic
wholesaler that in turn sells to local retailers of foreign items which in turn sell to final
consumers.
(3) Dual/Multiple Distribution
If a manufacturer selects a single channel member in each market to sell its product, there is no
conflict among the channel members in this single distribution channel.
However, if the manufacturer decides to reach a new target market but the only channel members
appropriate are those that also sell to the target market served by the original channel members,
then channel conflict will exist between the two channel members in each dual distribution
market because of the target market in common. For example, if a product is originally sold in
discount store that specializes in toys and is then offered for sale in a local department store, then
the two retailers may end up competing for some of the same customers. Competitive conflict
will therefore result.
The competitive atmosphere will increase if the manufacturer decides to add more retailers to sell
the product in each market. Such additions will lead to multiple distribution in the channel.
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Since multiple distribution exists for most products, there is a high degree of competitive conflict
in the marketplace. Figure 7.2 illustrates this concept.
Figure 7.2. Dual/Multiple Distribution
(4) Degrees of Market Exposure
A manufacturer can select from three levels of market expo¡sure for its market offering:
•
•
•
Intensive Distribution
Selective Distribution
Exclusive Distribution
Intensive Distribution:
Selective Distribution:
Exclusive Distribution:
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(5) Methods of Channel Cooperation
There are three approaches that a manufacturer can use to achieve the cooperation of channel
members:
•
•
•
Pushing Policy
Pulling Policy
Combination Policy
Pushing Policy:
Pulling Policy:
Combination Policy:
(6) Channel Conflict
Definition: When a channel member does something that prevents the goal attainment of another
channel member.
Types of conflict:
•
•
•
Horizontal (intra-type)
Intertype
Vertical
Horizontal Conflict (intra-type): Involves firms of the same type and at the same level in the
channel (e.g., supermarket vs. supermarket.
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Intertype Conflict: Involves firms at the same level of the channel, but of different types (e.g.,
supermarket vs. drug store).
Vertical Conflict: Involves firms at different levels within the channel (e.g., airline vs. travel
agent, manufacturer vs. wholesaler, wholesaler vs. retailer).
(7) Power
Definition: The exercise of power by one channel member involves an attempt by that channel
member to get another channel member to do something that the latter party would not do
without such intervention.
Types of Power:
•
•
•
•
•
Reward
Punishment (coercion)
Referent
Expert
Legitimate
Reward: Offer something of positive value to get other party to do what you want.
Punishment (coercion): Inflict a negative sanction (e.g., take away franchise, charge higher
delivery cost for late orders).
Referent: Channel member does what other channel member wants because the former member
wants to identify as being part of the channel in which the latter member is a member.
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Expert: Channel member does what other channel members wants because the former member
wants the benefit of the knowledge of the other channel member (e.g., franchisee vs. franchisor).
Legitimate: Channel members have a contract (e.g., franchise) which stipulates what has to be
done. If a party to the contract does not carry out what contract says, other channel member may
have to use punishment to get the other party to act (e.g., to member to court).
(8) Types of Channel Control
Channel control can be achieved via a direct channel or an indirect channel.
Types of Direct Channels:
•
•
Horizontal Integration
Vertical Integration
Horizontal Integration: Tale over other firm at same level in channel to remove conflict (e.g.,
supermarket buys competitor).
Vertical Integration: Channel member takes over other firm in at different level in channel.
•
Forward: manufacturer buys retailer.
•
Backward: retailer buys manufacturer.
Types of Indirect Channels:
•
•
Traditional
Administered
Traditional Channel: independent firms; channel members make own decisions
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A PRIMER FOR INTRODUCTORY MARKETING
Administered Channel: independent firms; but one channel member lets other channel member
make decisions for the first channel member.
(9) Marketing Functions
There are eight marketing functions that must be performed within a channel. While most of the
functions can be shifted from one level of the channel to another, none of the functions can be
entirely eliminated.
Marketing Functions:
•
•
•
•
•
•
•
•
Buying
Selling
Transporting
Storing
Grading/Sorting
Financing
Risk Taking
Market Information
Buying:
Selling:
Transporting:
Storing:
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Grading/Sorting:
Financing:
Risk Taking:
Market Information:
B. RETAILING
Topics:
(1) Socio-Economic Foundations of Retailing
(2) Theories of Retail Institutional Change
(3) The Product-Patronage Matrix
(1) Socio-Economic Foundations of Retailing
These foundations are used to explain why retailers exist and why retailers are justified in
charging the prices that they do.
Foundations:
•
•
•
•
•
•
Specialization and Division of Labor
Transactional Efficiency
Geometric Principle of Place Convenience
Economic Discrepancies
Provision of Information
Provision of Selected Services
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Specialization and Division of Labor: More efficient to do tasks separately (specialization) and to
assign each task to different individuals or entities (manufacturer - wholesaler - retailer).
Transactional Efficiencv:
Geometric Principle of Place Convenience:
Economic Discrepancies:
Provision of Information:
Provision of Selected Services:
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(2) Theories of Retail Institutional Change
These theories explain how the structure of retailing changes over time.
Theories:
•
•
•
•
The Theory of Natural Selection
The Wheel of Retailing
The General-Specific-General Theory (Accordion Theory)
The Dialectic Process
The Theory of Natural Selection:
The Wheel of Retailing:
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The General-Specific-General Theory (Accordion Theory):
The Dialectic Process:
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(3) The Product-Patronage Matrix
Both products and stores can be analyzed in each of two ways.
Approaches to Product Analysis:
•
Commodity Approach
•
Behavioral Approach
•
Approaches to Store Analysis:
•
•
Institutional Approach
Behavioral Approach
Bucklin (1964) developed the behavioral approach.
Commodity Approach to Product Analysis
The commodity approach to product analysis had its origins with Copeland (1923). Copeland
classified products in the following way:
•
•
•
Convenience Goods
Shopping Goods
Specialty Goods
Under this classification scheme, a product category can only fall into one classification. Its
placement is a function of the nature of the product category.
Convenience Good:
Shopping Good:
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Specialty Good:
Institutional Approach to Store Analysis
Under the institutional approach to store analysis, a given store type can only be classified into
one of the following three categories, based on the depth and width of product offering:
•
•
•
Convenience Store
Shopping Store
Specialty Store
Convenience Store:
Shopping Store:
Specialty Store:
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Specialty stores can be further subdivided into the following three subcategories:
•
•
•
Single-Line Specialty Store
Limited-Line Specialty Store
Super Specialty Store
Single-Line Specialty Store:
Limited-Line Specialty Store:
Super Specialty Store:
Behavioral Approach to Product Analysis
Under the behavioral approach to product analysis, a product is classified based on how a
consumer shops for the product, not on the basis of the characteristics of the product. Because of
this basis for classification, a given product can fall into more than one product classification.
Product Classifications:
•
•
•
Convenience Good
Shopping Good
Specialty Good
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Convenience Good:
Shopping Good:
Specialty Good:
Behavioral Approach to Store Analysis
Under the behavioral approach to store analysis, a store is classified based on how a consumer
shops for stores, not on the basis of the characteristics of the store. Because of this basis for
classification, a given store can fall into more than one store classification.
Store Classifications:
•
•
•
Convenience Store
Shopping Store
Specialty Store
Convenience Store:
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MARKETING MENTOR
Shopping Store:
Specialty Store:
When the behavioral approach to products is combined with the behavioral approach to stores,
the result is the product-patronage matrix.
Product-Patronage Matrix
Product
Classification
Store Classification
Convenience Store
Shopping Store
Specialty Store
Convenience Good
9
5
7
Shopping Good
3
1
2
Specialty Good
8
4
6
The lower the number, the greater is the defined shopping effort. Shopping across stores is
considered to involve more shopping effort than shopping within a store.
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Focus of Matrix: The intent underlying the consumer's behavior rather than the actual behavior.
Shopping Effort: If it is assumed that shopping stores takes more effort than shopping products,
then the numbers in the matrix cells reflect a ranking of shopping effort across the cells, with the
center cell reflecting the greatest level of shopping effort.
Intensity of Distribution Implications:
Merchandise Policy Implications:
C. WHOLESALING
Topics:
(1) Major Types
(2) Functions Performed
(3) Cost Effectiveness of Complex Channels
(1) Major Types
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(2) Functions Performed
(3) Cost Effectiveness of Complex Channels
D. PHYSICAL DISTRIBUTION
Topics:
(1) The Total Cost Concept
(2) Cost Trade-Offs
(1) The Total Cost Concept
A PRIMER FOR INTRODUCTORY MARKETING 147
(2) Cost Trade-Offs
E. LEGAL ASPECTS OF DISTRIBUTION
Topics:
01. Refusal to deal
02. Consignment selling
03. Exclusive dealing
04. Tied selling
05. Market restriction
06. Refusal to supply
07. Squeezing
08. Acquisition
09. Freight equalization
10. Fighting brands
11. Pre-emption
12. Buying up products
13. Incompatible product specifications
14. Influencing supplier's market behavior
15. Selling at below acquisition cost
01. Refusal to deal:
02. Consignment selling:
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03. Exclusive dealing:
04. Tied selling:
05. Market restriction:
06. Refusal to supply:
07. Squeezing:
08. Acquisition:
09. Freight equalization:
10. Fighting brands:
11. Pre-emption:
12. Buying up products:
13. Incompatible product specifications:
14. Influencing supplier's market behavior:
15. Selling at below acquisition cost: