MARKETING MANAGEMENT
LECTURES NOTES
Chapter 15: DESIGNING AND MANAGING VALUE NETWORKS AND CHANNELS
Prepared by: Mersid Poturak
Lecturer: Prof.Dr.Teoman Duman
Marketing Channels and Value Networks
Formally, marketing channels are sets of interdependent organizations involved in the process of
making a product or service available for use or consumption. They are the set of pathways a product or
service follows after production, culminating in purchase and use by the final end user.
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Merchants (wholesalers and retailers)
Agents (brokers, manufacturers' representatives, sales agents)
Facilitators (transportation companies, independent warehouses, banks, advertising agencies)
The Importance of Channels
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Push strategy involves the manufacturer using its sales force and trade promotion money to
induce intermediaries to carry, promote, and sell the product to end users.
Pull strategy involves the manufacturer using advertising and promotion to persuade consumers
to ask intermediaries for the product, thus inducing the intermediaries to order it.
Channel Development
- The channel system evolves in response to local opportunities and conditions.
- Today's successful companies are also multiplying the number of "go-to-market" or hybrid
channels in any one market area
- Companies that manage hybrid channels must make sure these channels work well together and
match each target customer's preferred ways of doing business.
Customers expect channel integration, characterized by the following features:
- The ability to order a product online and pick it up at a convenient retail location,
- The ability to return an online-ordered product to a nearby store of the retailer,
- The right to receive discounts based on total online and offline purchases.
Four categories of the buyers:
1. Habitual shoppers - Purchase from the same places in the same manner over time.
2. High value deal seekers - Know their needs and "channel surf" a great deal before buying
at the lowest possible price.
3. Variety-loving shoppers -Gather information in many channels, take advantage of high-touch
services, and then buy in their favorite channel, regardless of price.
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4. High-involvement shoppers- Gather information in all channels, make their purchase in a low-cost
channel, but take advantage of customer support from a high-touch channel.
Value Networks
The company should first think of the target market, however, and then design the supply chain backward
from that point. This view has been called demand chain planning.
Value network is a system of partnerships and alliances that a firm creates to source, augment, and
deliver its offerings. A value network includes a firm's suppliers and its suppliers' suppliers, and its
immediate customers and their end customers. The value network includes valued relations with others
such as university researchers and government approval agencies.
Managing this value network has required companies to make increasing investments in information
technology (IT) and software. They have invited such software firms as SAP and Oracle to design
comprehensive enterprise resource planning (ERP) systems to manage cash flow, manufacturing, human
resources, purchasing, and other major functions within a unified framework.
The Role of Marketing Channels
Producers do gain several advantages by using intermediaries:
- Many producers lack the financial resources to carry out direct marketing.
- Producers who do establish their own channels can often earn a greater return by increasing
investment in their main business.
- In some cases direct marketing simply is not feasible.
Intermediaries normally achieve superior efficiency in making goods widely available and accessible to
target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries
usually offer the firm more than it can achieve on its own.
Pictures shows one major source of cost savings using intermediaries. Part (a) shows three producers,
each using direct marketing to reach three customers. This system requires nine different contacts. Part
(b) shows the three producers working through one distributor, who contacts the three customers. This
system requires only six contacts. In this way, intermediaries reduce the number of contacts and the
work.
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Channel Functions and Flows
A marketing channel performs the work of moving goods from producers to consumers. It overcomes the
time, place, and possession gaps that separate goods and services from those who need or want them.
All channel functions have three things in common: They use up scarce resources; they can often be
performed better through specialization; and they can be shifted among channel members. When the
manufacturer shifts some functions to intermediaries, the producer's costs and prices are lower, but the
intermediary must add a charge to cover its work. If the intermediaries are more efficient than the
manufacturer, prices to consumers should be lower. If consumers perform some functions themselves,
they should enjoy even lower prices.
Channel Levels
A zero-level channel (also called a direct-marketing channel) consists of a manufacturer selling directly
to the final customer. The major examples are door-to-door sales, home parties, mail order,
telemarketing, TV selling, Internet selling, and manufacturer-owned stores.
A one-level channel contains one selling intermediary, such as a retailer.
A two-level channel contains two intermediaries. In consumer markets, these are typically a wholesaler
and a retailer.
A three-level channel contains three intermediaries
Channels normally describe a forward movement of products from source to user. One can also talk
about reverse-flow channels. They are important in the following cases:
(1) to reuse products or containers (such as refillable chemical-carrying drums);
(2) to refurbish products (such as circuit boards or computers) for resale;
(3) to recycle products (such as paper); and
(4) to dispose of products and packaging (waste products).
Service Sector Channels
As Internet and other technology advance, service industries such as banking, insurance, travel, and
stock buying and selling are operating through new channels. Reaching the right customers was a key
factor in one of the biggest financial services merger ever.
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Channel-Design Decisions
Designing a marketing channel system involves analyzing customer needs, establishing channel
objectives, identifying major channel alternatives, and evaluating major channel alternatives.
Analyzing Customers' Desired Service Output Levels
In designing the marketing channel, the marketer must understand the service output levels desired by
target customers. Channels produce five service outputs:
1. Lot size- The number of units the channel permits a typical customer to purchase on one
occasion.
2. Wailing and delivery time - The average time customers of that channel wait for receipt of the
goods.
3. Spatial convenience -The degree to which the marketing channel makes it easy for
customers to purchase the product.
4. Product variety -The assortment breadth provided by the marketing channel.
5. Service backup -The add-on services (credit, delivery, installation, repairs) provided by the
channel.
The marketing-channel designer knows that providing greater service outputs means increased channel
costs and higher prices for customers. Different customers have different service needs. The success of
discount stores indicates that many consumers are willing to accept smaller service outputs if they can
save money.
Establishing Objectives and Constraints
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Channel objectives should be stated in terms of targeted service output levels. Under competitive
conditions, channel institutions should arrange their functional tasks to minimize total channel
costs and still provide desired levels of service outputs.
Channel objectives vary with product characteristics.
Channel design must take into account the strengths and weaknesses of different types of
intermediaries.
Channel design must adapt to the larger environment. When economic conditions are depressed,
producers want to move their goods to market using shorter channels and without services that
add to the final price of the goods. Legal regulations and restrictions also affect channel design.
Identifying Major Channel Alternatives
Companies can choose from a wide variety of channels for reaching customers—from sales forces to
agents, distributors, dealers, direct mail, telemarketing, and the Internet. Each channel has unique
strengths as well as weaknesses.
Sales forces can handle complex products and transactions, but they are expensive. The Internet is much
less expensive, but it cannot handle complex products. Distributors can create sales, but the company
loses direct contact with customers.
The problem is further complicated by the fact that most companies now use a mix of channels.
A channel alternative is described by three elements: the types of available business intermediaries, the
number of intermediaries needed, and the terms and responsibilities of each channel member.
TYPES OF INTERMEDIARIES
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Sometimes a company chooses an unconventional channel because of the difficulty or cost of working
with the dominant channel. The advantage is that the company will encounter less competition during the
initial move into this channel.
NUMBER OF INTERMEDIARIES
Three strategies are available: exclusive distribution, selective distribution, and intensive distribution.
Exclusive distribution means severely limiting the number of intermediaries. It is used when the
producer wants to maintain control over the service level and outputs offered by the resellers. Often it
involves exclusive dealing arrangements.
Selective distribution involves the use of more than a few but less than all of the intermediaries who are
willing to carry a particular product. It is used by established companies and by new companies seeking
distributors.
Intensive distribution consists of the manufacturer placing the goods or services in as many outlets as
possible. This strategy is generally used for items such as tobacco products, soap, snack foods, and
gum, products for which the consumer requires a great deal of location convenience.
TERMS AND RESPONSIBILITIES OF CHANNEL MEMBERS
The producer must determine the rights and responsibilities of participating channel members. Each
channel member must be treated respectfully and given the opportunity to be profitable. The main
elements in the "trade-relations mix" are:
- price policies,
- conditions of sale,
- territorial rights, and
- specific services to be performed by each party.
Evaluating the Major Alternatives
Each channel alternative needs to be evaluated against economic, control, and adaptive criteria.
ECONOMIC CRITERIA
Each channel alternative will produce a different level of sales and costs.
CONTROL AND ADAPTIVE CRITERIA
Using a sales agency poses a control problem. A sales agency is an independent firm seeking to
maximize its profits. Agents may concentrate on the customers who buy the most, not necessarily those
who buy the manufacturer's goods. To develop a channel, members must make some degree of
commitment to each other for a specified period of time.
Channel-Management Decisions
After a company has chosen a channel alternative, individual intermediaries must be selected, trained,
motivated, and evaluated. Channel arrangements must be modified over time.
Selecting Channel Members
To facilitate channel member selection, producers should determine what characteristics distinguish the
better intermediaries. They should evaluate the number of years in business, other lines carried, growth
and profit record, financial strength, cooperativeness, and service reputation.
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Training Channel Members
Companies need to plan and implement careful training programs for their intermediaries.
Motivating Channel Members
A company needs to view its intermediaries in the same way it views its end users. It needs to determine
intermediaries' needs and construct a channel positioning such that its channel offering is tailored to
provide superior value to these intermediaries. The company should provide training programs, market
research programs, and other capability-building programs to improve intermediaries' performance.
Producers vary greatly in skill in managing distributors. Channel power can be defined as the ability to
alter channel members' behavior so that they take actions they would not have taken otherwise.
Manufacturers can draw on the following types of power to elicit cooperation:
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Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship if
intermediaries fail to cooperate.
Reward power. The manufacturer offers intermediaries an extra benefit for performing specific
acts or functions. Reward power typically produces better results than coercive power, but can be
overrated.
Legitimate power. The manufacturer requests a behavior that is warranted under the contract.
As long as the intermediaries view the manufacturer as a legitimate leader, legitimate power
works.
Expert power. The manufacturer has special knowledge that the intermediaries value.
Referent power. The manufacturer is so highly respected that intermediaries are proud to be
associated with it.
Evaluating Channel Members
Producers must periodically evaluate intermediaries' performance against such standards as sales-quota
attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and
cooperation in promotional and training programs.
Modifying Channel Arrangements
A producer must periodically review and modify its channel arrangements. Modification becomes
necessary when the distribution channel is not working as planned, consumer buying patterns change,
the market expands, new competition arises, innovative distribution channels emerge, and the product
moves into later stages in the product life cycle.
The most difficult decision involves revising the overall channel strategy. Distribution channels clearly
become outmoded, and a gap arises between the existing distribution system and the ideal system that
would satisfy target customers' needs and desires
Channel Integration and Systems
Vertical Marketing Systems
One of the most significant recent channel developments is the rise of vertical marketing systems. A
conventional marketing channel comprises an independent producer, wholesaler(s), and retailer(s). Each
is a separate business seeking to maximize its own profits, even if this goal reduces profit for the system
as a whole.
A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s)
acting as a unified system. One channel member, the channel captain, owns the others or franchises
them or has so much power that they all cooperate.
CORPORATE VMS
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A corporate VMS combines successive stages of production and distribution under single ownership.
ADMINISTERED VMS
An administered VMS coordinates successive stages of production and distribution through the size and
power of one of the members. Manufacturers of a dominant brand are able to secure strong trade
cooperation and support from resellers.
The most advanced supply-distributor arrangement for administered VMSs involve distribution
programming, which can be defined as building a planned, professionally managed, vertical marketing
system that meets the needs of both manufacturer and distributors.
CONTRACTUAL VMS
A contractual VMS consists of independent firms at different levels of production and distribution
integrating their programs on a contractual basis to obtain more economies or sales impact than they
could achieve alone. Johnston and Lawrence call them "value-adding partnerships" (VAPs). Contractual
VMSs now constitute one of the most significant developments in the economy.
They are of three types:
1. Wholesaler-sponsored voluntary chains - Wholesalers organize voluntary chains of independent
retailers to help them compete with large chain organizations.
2. Retailer cooperatives - Retailers take the initiative and organize a new business entity to carry on
wholesaling and possibly some production.
3. Franchise organizations -A channel member called a franchisor might link several successive stages
in the production-distribution process.
THE NEW COMPETITION IN RETAILING
The new competition in retailing is no longer between independent business units but between whole
systems of centrally programmed networks (corporate, administered, and contractual) competing against
one another to achieve the best cost economies and customer response.
Horizontal Marketing Systems
Another channel development is the horizontal marketing system, in which two or more unrelated
companies put together resources or programs to exploit an emerging marketing opportunity.
Multichannel Marketing Systems
Once, many companies sold to a single market through a single channel. Today, with the proliferation of
customer segments and channel possibilities, more companies have adopted multichannel marketing.
Multichannel marketing occurs when a single firm uses two or more marketing channels to reach one or
more customer segments.
Conflict Cooperation, and Competition
Channel conflict is generated when one channel member's actions prevent the channel from achieving
its goal. Channel coordination occurs when channel members are brought together to advance the
goals of the channel, as opposed to their own potentially incompatible goals.
Types of Conflict and Competition
Vertical channel conflict means conflict between different levels within the same channel.
Horizontal channel conflict involves conflict between members at the same level within the channel.
Multichannel conflict exists when the manufacturer has established two or more channels that sell to
the same market.
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Causes of Channel Conflict
One major cause is goal incompatibility. For example, the manufacturer may want to achieve rapid
market penetration through a low-price policy. Conflict can also stem from differences in perception.
Managing Channel Conflict
As companies add channels to grow sales, they run the risk of creating channel conflict. Some channel
conflict can be constructive and lead to better adaptation to a changing environment, but too much is
dysfunctional.
Legal and Ethical Issues in Channel Relations
E-Commerce Marketing Practices
E-business describes the use of electronic means and platforms to conduct a company's business.
E-commerce means that the company or site offers to transact or facilitate the selling of products and
services online. E-commerce has given rise in turn to e-purchasing and e-marketing.
E-purchasing means companies decide to purchase goods, services, and information from various
online suppliers. Smart e-purchasing has already saved companies millions of dollars.
E-marketing describes company efforts to inform buyers, communicate, promote, and sell its products
and services over the Internet. The eterm is also used in terms such as e-finance, e-learning, and eservice. But as someone observed, the e will eventually be dropped when most business practice is
online.
We can distinguish between pure-click companies, those that have launched a Web site without any
previous existence as a firm, and brick-and-click companies, existing companies that have added an
online site for information and/or e-commerce.
Pure-Click Companies
There are several kinds of pure-click companies: Search engines, Internet Service Providers (ISPs),
commerce sites, transaction sites, content sites, and enabler sites.
Brick-and-Click Companies
Many brick-and-mortar companies have agonized over whether to add an online e-commerce channel.
Many companies moved quickly to open Web sites describing their businesses but resisted adding ecommerce to their sites. They felt that selling their products or services online would produce channel
conflict—they would be competing with their offline retailers, agents, or their own stores.
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