DESIGNING AND MANAGING INTEGRATED MARKETING CHANNELS

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1 C H A P T E R 15 DESIGNING AND MANAGING INTEGRATED MARKETING CHANNELS LEARNING OBJECTIVES In this chapter, we will address the following questions: 1. What is a marketing channel system and a value network? 2. What work marketing channels perform? 3. How should channels be designed? 4. What decisions companies face in managing their channels? 5. How companies should integrate channels and manage channel conflict? 6. What are the key issues with e-commerce and m-commerce? SUMMARY 1. Most producers do not sell their goods directly to final users. Between producers and final users stands one or more marketing channels, a host of marketing intermediaries performing a variety of functions. 2.Marketing-channel decisions are among the most critical decisions facing management. The company s chosen channel(s) profoundly affect all other marketing decisions. 3. Companies use intermediaries when they lack the financial resources to carry out direct marketing, when direct marketing is not feasible, and when they can earn more by doing so. The most important functions performed by intermediaries are information, promotion, negotiation, ordering, financing, risk taking, physical possession, payment, and title. 4. Manufacturers have many alternatives for reaching a market. They can sell direct or use one-, two-, or three-level channels. Deciding which type(s) of channel to use calls for analyzing customer needs, establishing channel objectives, and identifying and evaluating the major alternatives, including the types and numbers of intermediaries involved in the channel. 5. Effective channel management calls for selecting intermediaries and training and motivating them. The goal is to build a long-term partnership that will be profitable for all channel members. 6. Marketing channels are characterized by continuous and sometimes dramatic change. Three of the most important trends are the growth of vertical marketing systems, horizontal marketing systems, and multichannel marketing systems.

2 7. All marketing channels have the potential for conflict and competition resulting from such sources as goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. There are a number of different approaches companies can take to try to manage conflict. 8. Channel arrangements are up to the company, but there are certain legal and ethical issues to be considered with regard to practices such as exclusive dealing or territories, tying agreements, and dealers rights. 9. E-commerce has grown in importance as companies have adopted brick-and-click channel systems. Channel integration must recognize the distinctive strengths of online and offline selling and maximize their joint contributions. 10. An emerging new area is m-commerce and marketing through cell phones and PDAs. OPENING THOUGHT Most students are not familiar with channels of distribution, except, perhaps, from the retailer in which they have bought products. Therefore, the instructor has to ensure that they clarify the various channels of distribution during this chapter lecture. Examples of the various channels for products familiar to the students can help illustrate the complexity of the process. Second, because marketing channel decisions are mostly hidden from the final consumer, the instructor should make every effort to diagram the decision-making process for each level of channel distribution. Starting with the retail price of the product, then subtracting each distribution level margins or markups shows the effects of distribution to or for the product. Managing channels of distribution will be new to most students, as will the definitions of channel conflict and channel support. The instructor can best serve the student by fully diagramming a particular product from a channel of distribution perspective and talking about channel roles, conflicts, training, and motivation. The students will probably be most interested in, or knowledgeable about, e-commerce and see e-commerce as the future of business. The instructor should caution the students about assuming that all business transactions (or a great majority of them) will flow to e-commerce by describing to the students the various consumer demographic groups, buying habits, and comfortableness with technology. An in-class discussion on the merits and demerits of e-commerce should provide for a lively cross-section of opinions.

3 TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. At this point in the semester-long project, students should present their channel decisions for getting their product or service to the consumer. In evaluating this section, the instructor should evaluate the completeness of the projects to the material contained in this chapter. 2. Progressive companies have begun developing a value network system to get products in the hands of consumers. A value network includes a firm s suppliers, its suppliers suppliers, its immediate customers, and their end customers. Students should identify a company that has successfully set up a value network, then compare and contrast the components of the value system to a competitor that does not have one. Students should be able to identify the components of the value network that produced the augmented offering. 3. Sonic PDA Marketing Plan: Manufacturers need to pay close attention to their marketing channels. By planning the design, management, evaluation, and modification of their marketing channels, manufacturers can ensure their products are available when and where customers want to buy. At Sonic, you have been asked to develop a channel strategy for Sonic Based on the information you previously gathered and the decisions you have already made about the target market, product, and pricing, answer the following: What decisions must Sonic make to develop the five marketing flows (physical product, title, payment, information, and promotion) for Sonic 1000? How many levels would be appropriate for the consumer and business markets you are targeting for Sonic 1000? Should you plan for exclusive, selective, or intensive distribution? What decisions must Sonic make to develop the five service outputs (lot size, waiting time, spatial convenience, product variety, and service back up) for Sonic 1000? Document your recommendations about marketing channels and strategy in a written marketing plan or type the recommendations into the Marketing Mix and Channels sections of Marketing Plan Pro. ASSIGNMENTS Top marketing companies are employing both a push and a pull strategy to deliver incremental sales. Take the example of the company called Sepracor, Inc. as defined in the chapter. Its product Lunestra has caused the company s stock price to soar. Using this product as an example, have the students a) track the number of pharmaceutical products advertised on television and b) comment on whether or not this increased

4 advertising is increasing the demand by increasing the awareness of certain medical conditions. Ask the students to comment on the hybrid channel of distribution. The hybrid channel as defined in the chapter poses an interesting channel for future marketers. As students grow into consumers will they or won t they rely on purchasing products exclusively through the Internet? Or will they demand hybrid distribution choices like free shipment to store sites (like Wal-Mart) or pick up at the store like Circuit City? Today, some of the countries more successful companies are using a hybrid channel system to increase its effectiveness of reaching the consumer. The text uses the examples of IBM, Charles Schwab, and others and notes that channel integration and its features are what the consumer prefers. Students should choose or find one additional example of a firm using the hybrid system, and comment on how they see this system delivering value to the consumer. Student answers should be directed toward the three features of channel integration found in the textbook. In the Marketing Insight article entitled, Trasforming Your Go-to-Market Stratgey: The Three Disciplines of Channel Management, V. Kasturi Rangan Boston, MA: Harvard Business School Press, 2006 identifies new opportunities for marketing products through multiple channels by crafting a channel steward. Ask the students to read this article and comment on its practicality in light of the changes posed by Internet shopping. Channel members add value to the consumer s purchase of certain products and services. Table 15.1 details key channel member functions. Yet some firms have abandoned channel partners and tried to reach the consumer on a one-to-one basis. Selecting a product or firm that (a) is maintaining its channel members, and (b) a firm that has decided to sell directly to the consumer thus bypassing channel intermediaries. Comment on these two systems in terms of the information contained in the chapter. END-OF-CHAPTER SUPPORT MARKETING DEBATE Does It Matter Where You Sell? Some marketers feel that the image of the particular channel in which they sell their products does not matter all that matters is that the right customers shop there and the product is displayed in the right way. Others maintain that channel images such as a retail store can be critical and must be consistent with the image of the product. Take a position: Channel images do not really affect the brand images of the products they sell that much versus channel images must be consistent with the brand image. Pro: Buyers buy products or use services to meet a particular need or want. In the marketingdecision making process, a consumer has a preformed image of the product or service based upon the company s reputation or marketing messages. Therefore, where the consumer finally purchases the product is immaterial to the consumer, as long as, the product performs to expectations and that the process of purchasing the product is as simplified as possible. Strongly advertised products, or those products, with strong brand names will have consumers seeking out their products regardless of which channel of distribution the company uses. Some

5 marketers benefit from extensive distribution channels, as their products are impulse items, last minute decision items, or cater to consumer habits. For marketers of these items, it is important for them to be available when the consumers desires strike. Con: The consumer buying process, the consumer value proposition, changes and reflects shifting priorities based on the individual needs and wants of the consumer at the time of purchase. For key products or services, consumers require, and even demand, different levels of service, attention, or exclusivity in the purchase. These consumers needs can and are met by different channels of distribution and are influenced by what channel or channels of distribution the producer uses; how well trained and motivated the channel is; and how the channel services the customer. There is no correct or optimum channel of distribution for all products. As products flow through a life cycle, older channels will evaporate and newer ones will develop. As consumer attitudes, positions, and usages of the products change, the consumers will navigate to differing channels. A product sold at one time through exclusive dealerships, at the beginning of its life cycle, may now be sold through mass-merchants or discounters at the end of its product life cycle. Marketing Excellence: AMAZON. COM 1) Why has Amazon.com succeeded online when so many other companies have failed? Suggested Answer: One key to Amazon.com s success in all these different ventures is its willingness to invest in the latest Internet technology to make shopping online faster, easier, and more personally rewarding for its customers and third-party merchants. Amazon.com has established itself as an electronic marketplace by enabling merchants of all kinds to sell items on the site useful information and more choices Amazon.com has diversified its product lines into DVDs, music CDs, computer software, video games, electronics, apparel, furniture, food, toys, and more Amazon.com introduced Amazon MP3, which competes directly with Apple s itunes and has participation from all the major music labels. 2) Will the Kindle revolutionize the book industry? Why or why not? Suggested Answer: Student s answers will vary Apple fans will disagree stating that the ipad will overtake the Kindle in sales and usage in a few years. Traditionalists will hold that the paper book still has a loyal following. 3) What s next for Amazon.com? Is cloud computing the right direction for the company? Where else can it grow? Suggested Answer: Student answers will be mostly speculative in nature but one area that could be addressed is the merger / assimilation of M-commerce, Amazon.com, and E- commerce so that the consumer would be able to buy whatever they d like, whenever they d like, from wherever they re at! Marketing Excellence: TESCO

6 1) As Tesco expands overseas, can it succeed by using the same strategies it has used in the United Kingdom? Why or Why not? What factors should it take into account in formulating strategies in global markets? Suggested Answer: Tesco s strategy has been to open stores of different sizes and sell different types of goods in each store. Since it was the first store in the UK to operate like this, Tesco were successful. The same strategy may not work in all countries. The purchase behavior of consumers and their cultural values will differ across countries, and the presence of competition must also be taken into consideration when choosing appropriate strategies. For example, setting up an online store would not be advantageous in countries with low Internet penetration. In Singapore and Malaysia, for example, stores such as Carrefour already have an established presence; Tesco would need to use different strategies in order to compete in these markets. 2) What are the ways in which Tesco connects with its customers to provide more value for money? Suggested Answer: Tesco s Club Cards provide a loyalty system through which customers who make frequent and high-value purchases benefit in the form of vouchers. Tesco also retains information regarding consumers purchase patterns, and consequently, store managers can alert customers when there are promotions that might interest them. The store also provides valet services to customers who spend heavily. Additionally, they solicit feedback regarding pricing, quality, and in-store service. MARKETING DISCUSSION Think of your favorite retailers. How have the retailers integrated channel systems? How would you like to see channels integrated? Do you use multiple channels from the retailers? Why? Student answers will differ depending upon their favorite retailers. However, all answers should include the definition of channel integration: Customers expect channel integration characterized by the following features: 1. The ability to order a product online and pick it up at a convenient retail location. 2. The ability to return an online ordered product to a nearby store of the retailer. 3. The right to receive discounts based on total online and off-line purchases DETAILED CHAPTER OUTLINE Successful value creation needs successful value delivery. Holistic marketers are increasingly taking a value network view of their businesses. Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final consumers. Companies are looking at the suppliers suppliers upstream and at the distributors customers downstream. They are looking at customer segments and considering a wide range of different possible means to sell, distribute, and service their offerings. Companies today must build and manage a continuously evolving and increasingly complex channel system and value network.

7 MARKETING CHANNELS AND VALUE NETWORKS Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. A) These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). B) Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. C) Some intermediaries buy, take title to, and resell the merchandise; they are called merchants. D) Others search for customers and may negotiate on the producer s behalf but do not take title to the goods; they are called agents. E) Still others assist in the distribution process but neither takes title to goods nor negotiates purchases or sales; they are called facilitators. The Importance of Channels A marketing channel system is the particular set of marketing channels employed by a firm. A) Decisions about the marketing channel system are among the most critical facing management. B) In the United States, channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price. C) Marketing channels also represent a substantial opportunity cost. 1) Converting potential buyers into profitable orders is one of the chief roles of marketing channels. 2) Marketing channels must not just serve markets, they must also make markets. D) The channels chosen affect all other marketing decisions: 1) The company s pricing depends on whether it uses mass-merchandisers or highquality boutiques. 2) The firm s sales force and advertising decisions depend on how much training and motivation dealers need. E) In addition, channel decisions involve relatively long-term commitments to other firms as well as a set of policies and procedures. F) In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing. 1) A 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 user.

8 a. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the stores, the product is an impulse item, and product benefits are well understood. 2) A pull strategy involves the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it. a. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between brands, and when people choose the brand before they go to the store. Hybrid Channels and Multichannel Marketing Today s successful companies are also multiplying the number of go-to-market or hybrid channels in any one market area. Hybrid channels or multichannel marketing occurs when a single firm uses two or more marketing channels to reach customer segments. A) Companies that manage hybrid channels must make sure these channels work well together and match each target customer s preferred ways of doing business. B) Customers expect channel integration, characterized by the following features: 1) order a product online and pick it up at a convenient retail location 2) to return an online ordered product to a nearby store of the retailer. 3) receive discounts based on total online and off-line purchases. Value Networks A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow. The company should first think of the target market, and then design the supply chain backward from that point. A) This view has been called demand chain planning. B) An even broader view sees a company at the center of a value network a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings. C) A value network includes a firm s suppliers, its suppliers suppliers, its immediate customers, and their end customers. D) A company needs to orchestrate these parties to enable it to deliver superior value to the target market. E) Demand chain planning yields several insights: 1) The company can estimate whether more money is made upstream or downstream. 2) The company is more aware of disturbances anywhere in the supply chain that might cause costs, prices, or supplies to change suddenly.

9 3) Companies can go online with their business partners to carry on faster and more accurate communications, transactions, and payments to reduce costs, speed up information, and increase accuracy. F) Managing this value network has required companies to make increasing investments in information technology (IT) and software. G) Marketers have traditionally focused on the side of the value network that looks toward the customer. In the future, they will increasingly participate in, influence their companies upstream activities, and become network managers. THE ROLE OF MARKETING CHANNELS Why would a producer delegate some of the selling jobs to intermediaries, relinquishing control over how and to whom the products are sold? Through their contacts, experience, specialization, and scale of operation, intermediaries make goods widely available and accessible to target markets, usually offering the firm more effectiveness and efficiency than it can achieve on its own. A) Many producers lack the financial resources to carry out direct marketing. 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 and want them. A) Members of the marketing channel perform a number of key functions. B) Some functions constitute a forward flow of activity from the company to the customer. C) Other functions constitute a backward flow from customers to the company. D) Still others occur in both directions. A manufacturer selling a physical product and services might require three channels: 1) A sales channel 2) A delivery channel 3) A service channel B) The question is not whether various channel functions need to be performed but rather, who is to perform them. C) All channel functions have three things in common: 1) They use up scarce resources. 2) They can often be performed better though specialization. 3) They can be shifted among channel members. Channel Levels The producer and the final consumer are part of every channel. A) A zero-level channel (also called a direct-marketing channel) consists of a manufacturer selling directly to the final consumer.

10 B) A one-level channel contains one selling intermediary such as a retailer. C) A two-level channel contains two intermediaries a wholesaler and a retailer. D) A three-level channel contains wholesalers, jobbers, and retailers. Channels normally describe a forward movement of products from source to user. A) One can also talk about reverse-flow channels. B) Reverse-flow channels are important in the following cases: 1) To reuse products or containers 2) To refurbish products for resale 3) To recycle products 4) To dispose of products and packaging C) Several intermediaries play a role in reverse-flow channels. Service Sector Channels As Internet and other technologies advance, service industries are operating through new channels. A) Marketing channels also keep changing in person marketing. CHANNEL-DESIGN DECISIONS To design a marketing channel system, marketers analyze customer needs, establishing channel objectives, identifying major channel alternatives, and evaluating major channel alternatives. Analyzing Customers Desired Service Output Levels Consumers may choose the channels they prefer based on price, product assortment, and convenience, as well as their own shopping goals (economic, social, or experiential). Even the same consumer may choose different channels for different functions in a purchase. Some consumers are willing to trade up or trade down. Channels produce five service outputs: 1) Lot size 2) Waiting and delivery time 3) Spatial convenience 4) Product variety 5) Service backup The marketing-channel designer knows that providing greater service outputs means increased channel costs and higher prices for customers. Establishing Objectives and Constraints Marketers should state their channel objectives in terms of targeted service output levels.

11 A) Channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs. B) Planners can identify several market segments that want different service levels. C) Channel objectives vary with product characteristics. D) Marketers must adapt their channel objectives to the larger environment. E) Channel design must take into account the strengths and weaknesses of different types of intermediaries. F) In entering new markets, firms often closely observe what other firms are doing. Identifying and Evaluating Major Channel Alternatives Each channel has unique strengths as well as weaknesses. A channel alternative is described by three elements: 1) The types of available business intermediaries. 2) The number of intermediaries needed. 3) The terms and responsibilities of each channel member. Types of Intermediaries A firm needs to identify the types of intermediaries available to carry on its channel work. A) Companies should search for innovative marketing channels. B) Sometimes a company chooses an unconventional channel because of the difficulty, cost, or ineffectiveness 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 based on the number of intermediaries are exclusive distribution, selective distribution, and intensive distribution. A) Exclusive distribution means severely limiting the number of intermediaries. 1) It is used when the producer wants to maintain control over the service level and outputs offered by the resellers. 2) Often it involves exclusive dealing arrangements. 3) Exclusive deals between suppliers and retailers are becoming a mainstay for specialists looking for an edge in the business world. B) 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. C) Intensive distribution consists of the manufacturer placing goods or services in as many outlets as possible.

12 D) Manufacturers are constantly tempted to move from exclusive or selective distribution to intensive distribution to increase coverage and sales. Terms and Responsibilities of Channel Members Each channel member must be treated respectfully and given the opportunity to be profitable. A) The main elements in the trade-relations mix are: 1) Price policy 2) Conditions of sale 3) Distributors territorial rights 4) Mutual services and responsibilities Evaluating the Major Alternatives Each channel alternative needs to be evaluated against economic, control, and adaptive criteria. Economic Criteria A) Each channel will produce a different level of sales and costs. B) Firms will try to align customers and channels to maximize demand at the lowest overall cost. C) Sellers try to replace high-cost channels with low-cost channels as long as the value added per sale is sufficient. Control and Adaptive Criteria Using a sales agency poses a control problem. To develop a channel, members must make some degree of commitment to each other for a specified period of time A) Yet these commitments invariably lead to a decrease in the producer s ability to respond to a changing marketplace. B) In rapidly, changing, volatile, or uncertain product markets, the producer needs channel structures and policies that provide high adaptability. CHANNEL-MANAGEMENT DECISIONS After a company has chosen a channel system, it must select, train, motivate, and evaluate individual intermediaries for each channel. It must also modify channel design and arrangements over time. Selecting Channel Members To customers, the channels are the company. Companies need to select their channel members carefully. A) To facilitate channel member selection, producers should determine what characteristics distinguish better intermediaries.

13 B) They should evaluate the: 1) Number of years in business 2) Other lines carried 3) Growth and profit records 4) Financial strength 5) Cooperativeness 6) Service reputation C) If the intermediaries are sales agents, producers should evaluate the: 1) Number and character of other lines carried. 2) Size and quality of the sales force. D) If the intermediaries are department stores that want exclusive distribution, the producer should evaluate: 1) Locations 2) Future growth potential 3) Type of clientele Training and Motivating Channel Members A company needs to determine intermediaries needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries. A) Stimulating channel members to top performance starts with understanding their needs and wants. B) The company should provide training programs and market research programs to improve intermediaries performance. C) The company must constantly communicate its view that the intermediaries are partners in a joint effort to satisfy end users of the product. Channel Power Producers vary greatly in skill in managing distributors. Channel power can be defined as the ability to alter channel member s behavior. Manufacturers can draw on the following types of power to elicit cooperation: 1) Coercive power 2) Reward power 3) Legitimate power 4) Expert power 5) Referent power Coercive and reward power are objectively observable.

14 Legitimate, expert, and referent power are more subjective and dependent on the ability and willingness of parties to recognize them. Most producers see gaining intermediaries cooperation as a huge challenge. Companies that are more sophisticated try to forge a long-term partnership with distributors. Channel Partnerships More sophisticated companies try to forge a long-term partnership with distributors. The manufacturer clearly communicates what it wants from its distributors in the way of market coverage, inventory levels, marketing development, account solicitation, technical advice and services, and marketing information and may introduce a compensation plan for adhering to the policies. To streamline the supply chain and cut costs, many manufacturers and retailers have adopted efficient consumer response practices (ECR) to organize their relationships in three areas: 1) demand side management or collaborative practices 2) supply side management to optimize supply 3) enablers and integrators, to support joint activities that reduce operational problems Evaluating Channel Members Producers must periodically evaluate intermediaries performance against such standards as sales quota attainment, average inventory levels, customer delivery times, treatment of damaged and lost goods, and cooperation in promotional and training programs. A) Under performers need to be counseled, retrained, motivated, or terminated Modifying Channel Design and Arrangements No channel strategy remains effective over the whole product life cycle. In competitive markets with low entry barriers the optimal structure will inevitably change over time. The change could mean adding or dropping individual market channels or channel members or developing a totally new way to sell goods. Channel Evolution A new firm typically starts as a local operation selling in a fairly circumscribed market, using a few existing intermediaries. Identifying the best channels might not be a problem; the problem is often to convince the available intermediaries to handle the firm s line. If the firm is successful, it might branch into new markets with different channels. In smaller markets, the firm might sell directly to retailers; in larger markets, through distributors. In rural areas, it might work with general-goods merchants; in urban areas, with limitedline merchants. It might grant exclusive franchises or sell through all willing outlets.

15 Channel Modification Decisions A producer must periodically review and modify its channel design and arrangements. The distribution channel may not work 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. Adding or dropping individual channel members requires an incremental analysis. Increasingly detailed customer databases and sophisticated analysis tools can provide guidance into those decisions. Global Channel Considerations International markets pose distinct challenges, including variations in customers shopping habits, but create opportunities at the same time. The first step in global channel planning, as is often the case in marketing, is to get close to customers. A good retail strategy that offers customers a positive shopping experience and unique value, if properly adapted, is likely to find success in more than one market. CHANNEL INTEGRATION AND SYSTEMS Distribution channels don t stand still. New wholesaling and retailing institutions emerge, and new channel systems evolve. Vertical Marketing Systems A conventional marketing system comprises an independent producer, wholesaler(s), and retailer(s). A) A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a unified system. 1) One channel member, the channel captain, owns the others, franchises them, or has so much power that they all cooperate. B) VMSs arose as a result of strong channel members attempts to control channel behavior and eliminate the conflict that results when independent members pursue their own objectives. C) VMSs achieve economies through: 1) Size 2) Bargaining power 3) The elimination of duplicated services E) There are three types of VMS:

16 1) Corporate 2) Administered 3) Contractual Corporate VMS A) A corporate VMS combines successive stages of production and distribution under single ownership. Administered VMS A) An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. B) Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. C) The most advanced supply-distributor arrangement for administered VMS involves distribution programming that can be defined as building a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors. D) The manufacturer establishes a department within the company called distributorrelations planning. 1) Its job is to identify distributor needs and build up merchandising programs to help each distributor operate as efficiently as possible. Marketing Insight: Channel Stewards Take Charge The definition of channel stewards: the ability of a given participant in the distribution channel to create a go-to-market strategy that simultaneously addresses customers best interests and drives profits for all partners. 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. A) Contractual VMSs now constitute one of the most significant developments in the economy. B) There are three types: 1) Wholesaler-sponsored voluntary chains 2) Retailer cooperatives 3) Franchise organizations C) The traditional system is the manufacturer-sponsored retailer franchise. D) Another is the manufacturer-sponsored wholesaler franchise.

17 E) A new system is the service-firm-sponsored retailer franchise. 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. Integrating Multi-Channel Marketing Systems Most companies have adopted multichannel marketing. A) Multi-channel marketing occurs when a single firm uses two or more marketing channels to reach one or more customer segments. B) An integrated marketing channel system is one in which the strategies and tactics of selling through one channel reflect the strategies and tactics of selling through other channels. C) By adding more channels, companies can gain three important benefits: 1) Increased market coverage 2) Lower channel cost 3) More customized selling D) The gains from adding new channels come at a price: 1) New channels typically introduce conflict and control problems. 2) Two or more channels may end up competing for the same customers. 3) The new channel may be more independent and make cooperation more difficult. E) Companies need to think through their channel architecture. They must determine which channels should perform which functions. F) Companies should use different sales channels for different-sized business customers. G) Multichannel marketers also need to decide how much of their product to offer in each of the channels. CONFLICT, COOPERATION, AND COMPETITION Channel conflict is generated when one channel member s actions prevents 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.

18 Types of Conflict and Competition A) Horizontal channel conflict involves conflict between members at the same level within the channel. B) Vertical channel conflict means conflict between different levels within the same channel. C) Multi-channel conflict exists when the manufacturer has established two or more channels that sell to the same market. 1) Multi-channel conflict is likely to be especially intense when the members of one channel get a lower price (based on larger volume purchases) or work with a lower margin. Causes of Channel Conflict A) goal incompatibility B) unclear roles and rights C) differences in perception D) intermediary s dependence on the manufacturer Managing Channel Conflict Some channel conflict can be constructive and lead to better adaptation to a changing environment, but too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better. There are several mechanisms for effective conflict management. 1) Strategic justification 2) Dual compensation 3) Superordinate goals 4) Employee exchange 5) Joint membership 6) Co-option 7) Diplomacy, mediation, and arbitration 8) Legal recourse Dilution and Cannibalization Marketers must also be careful not to dilute their brands through inappropriate channels, particularly luxury brands whose images often rest on exclusivity and personalized service. Legal and Ethical Issues in Channel Relations Companies are legally free to develop whatever channel arrangements suit them. In fact, the law seeks to prevent companies from using exclusionary tactics that might keep competitors from using a channel.

19 A) Many producers like to develop exclusive channels for their products. 1) When the seller requires that these dealers not handle competitors products, this is called exclusive distribution. 2) Exclusive distribution is legal as long as they do not substantially lessen competition or tend to create a monopoly, and as long as both parties enter into the agreement voluntarily. 3) Exclusive distribution often includes exclusive territorial agreements. a. The producer may agree not to sell to other dealers in a given area. b. The buyer may agree to sell only in its own territory. (i) This second practice has become a major legal issue. B) Producers of a strong brand sometimes sell it to dealers only if they will take some or all of the rest of the line. 1) This practice is called full-line forcing. C) Such tying agreements are not necessarily illegal, but they do violate U.S. law if they tend to lessen competition substantially. D) Producers are free to select their dealers, but their right to terminate dealers is somewhat restricted. 1) Producers can drop dealers for cause but they cannot drop dealers if the dealer refuses to cooperate in doubtful legal arrangements. E-COMMERCE MARKETING PRACTICES E-commerce uses a Web site to transact or facilitate the sale of products and services online. Online retail sales have exploded in recent years, and it is easy to see why. Online retailers can predictably provide convenient, informative, and personalized experiences for vastly different types of consumers and businesses. We can distinguish between pure-click companies and brick-and-click companies. Pure-Click Companies There are several kinds of pure-click companies: 1) Search engines 2) Internet Service Providers (ISPs) 3) Commerce sites 4) Transaction sites 5) Content sites 6) Enabler sites E-COMMERCE SUCCESS FACTORS Companies must set up and operate their e-commerce Web sites carefully. Customer service is critical.

20 Online shoppers may select an item for purchase but fail to complete the transaction one estimate of the conversion rate of Internet shoppers in March 2008 was only about 35%. A) Consumer surveys suggest that most significant inhibitors of online shopping are the absence of: 1) Pleasurable experiences 2) Social interaction 3) Personal consultation B2B E COMMERCE Although business to consumer (B2C) Web sites have attracted much attention in the media, even more activity is being conducted on business to business (B2B) sites, which are changing the supplier customer relationship in profound ways. In the past, buyers exerted a lot of effort to gather information about worldwide suppliers. B2B sites make markets more efficient, giving buyers easy access to a great deal of information from: (1) supplier Web sites; (2) infomediaries, third parties that add value by aggregating information about alternatives; (3) market makers, third parties that link buyers and sellers; and (4) customer communities, where buyers can swap stories about suppliers products and services. Firms are using B2B auction sites, spot exchanges, online product catalogs, barter sites, and other online resources to obtain better prices. Brick-and-Click Companies Although many brick-and-mortar companies may have initially debated whether to add an online e-commerce channel for fear of channel conflict with their off-line retailers, agents, or their own stores, most eventually added the Internet as a distribution channel after seeing how much business was generated online. A) Adding an e-commerce channel creates the threat of a backlash from retailers, brokers, agents, or other intermediaries. B) The question is how to sell both through intermediaries and online. C) There are at least three strategies for trying to gain acceptance from intermediaries: 1) Offer different brands or products on the Internet. 2) Offer the off-line partners higher commissions to cushion the negative impact on sales. 3) Take orders on the Web site but have retailers deliver and collect payment.

21 D) Some pure or predominately online companies have invested in brick-and-mortar sites. E) Ultimately, companies may need to decide whether to drop some or all of their retailers and go direct. M-COMMERCE MARKETING PRACTICES The widespread penetration of cell phones and smart phones there are currently more mobile phones than personal computers in the world allows people to connect to the Internet and place online orders on the move. Many see a big future in what is now called m-commerce (m for mobile). The existence of mobile channels and media can keep consumers connected and interacting with a brand throughout their day-to-day lives. GPS-type features can help identify shopping or purchase opportunities for consumers for their favorite brands. In some countries, m-commerce already has a strong foothold. Millions of Japanese teenagers carry DoCoMo phones available from NTT (Nippon Telephone and Telegraph). They can also use their phones to order goods. Each month, the subscriber receives a bill from NTT listing the monthly subscriber fee, the usage fee, and the cost of all the transactions. Bills can be paid at the nearest 7-11 store. In the United States, mobile marketing is becoming more prevalent and taking all forms. Retailers such as Amazon, CVS, and Sears have launched m commerce sites that allow consumers to buy books, medicine, and even lawn mowers from their smart phones. The travel industry has used m commerce to target businesspeople who need to book air or hotel reservations while on the move. Mobile marketing can have influence inside the store too. Consumers increasingly are using a cell phone to text a friend or relative about a product while shopping.